ABC Ltd. needs Rs 500 lacs for an expansion plan that is expected to yield 15% return on assets. Currently its return on asset is 12% and the firm is all equity funded. For expansion it has alternatives of funding the entire expenditure either through debt or equity. Following information is available:

Nos. of shares already existing                                   20 lacs

Price at which the shares can be issued (Rs)             Rs 50

Existing interest                                                          Rs 30 lacs

Interest rate on debt                                                  10%

Tax rate                                                                       40%

Find out the new EPS with equity and debt financing. Also find at what level of earnings the firm is indifferent to mode of financing.

Answer rating: 100% (QA)

Step 1 Currently Value of Assets Current Value of Equity 20 500 1000 lacs Return on Existing Asset... View the full answer