ABC Ltd, has currently an equity share capital of Rs.15 lacs (Face value Rs.10). The company...

 

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ABC Ltd, has currently an equity share capital of Rs.15 lacs (Face value Rs.10). The company is looking for diversification of its business for which it requires a sum of Rs.25 lacs. The company has the following alternatives to raise the fund. i) Completely through equity shares ii) Rs.10 lacs through equity shares and the balance through 12% debentures iii) Rs.10 lacs through equity shares and the balance through 11% preference shares iv) Rs.10 lacs through equity shares, Rs.10 lacs through 13% loans and the balance through 11% preference shares. The expected EBIT is Rs.8 lacs and the corporate tax rate is 30%. Advise the company to select the best alternative. ABC Ltd, has currently an equity share capital of Rs.15 lacs (Face value Rs.10). The company is looking for diversification of its business for which it requires a sum of Rs.25 lacs. The company has the following alternatives to raise the fund. i) Completely through equity shares ii) Rs.10 lacs through equity shares and the balance through 12% debentures iii) Rs.10 lacs through equity shares and the balance through 11% preference shares iv) Rs.10 lacs through equity shares, Rs.10 lacs through 13% loans and the balance through 11% preference shares. The expected EBIT is Rs.8 lacs and the corporate tax rate is 30%. Advise the company to select the best alternative.

Answer rating: 100% (QA)

To advise the company on the best alternative for raising funds we need to calculate the earnings available for equity shareholders under each option and compare them The alternative with the highest ... View the full answer