A company's capital structure consists of the following: Equity share (Face value Rs.100) Retained earnings 2,000,000...

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A company's capital structure consists of the following: Equity share (Face value Rs.100) Retained earnings 2,000,000 1,000,000 1,200,000 800,000 5,000,000 The company earns 12% on its employed capital. The tax rate is 50%. The company require a sum of Rs.2.50 million to finance its expansion program for which following alternatives are available to it: Issue 20,000 equity shares at a premium of Rs.25 per share, or Issue 10% preference shares, or 9% Preference shares 7% Debentures Issue of 8% debentures. It is estimated that the price earning ratio in case of equity shares, preference shares and debentures financing would be 21.40, 17.0 and 15.70 respectively. Required: You are required to evaluate each proposal and recommend the best alternative. A company's capital structure consists of the following: Equity share (Face value Rs.100) Retained earnings 2,000,000 1,000,000 1,200,000 800,000 5,000,000 The company earns 12% on its employed capital. The tax rate is 50%. The company require a sum of Rs.2.50 million to finance its expansion program for which following alternatives are available to it: Issue 20,000 equity shares at a premium of Rs.25 per share, or Issue 10% preference shares, or 9% Preference shares 7% Debentures Issue of 8% debentures. It is estimated that the price earning ratio in case of equity shares, preference shares and debentures financing would be 21.40, 17.0 and 15.70 respectively. Required: You are required to evaluate each proposal and recommend the best alternative.

Answer rating: 100% (QA)

To evaluate each proposal and recommend the best alternative for financing the companys expansion program we need to calculate the cost of each option ... View the full answer