ASSET= Php 1,500,000

LIABILITIES= Php 200,000

SHE= Php 1,300,000

 

There are 10,000 shares outstanding, par value of Php 100 per share. The company is evaluating a project proposal requiring additional capital of Php 500,000 so as to increase its operating income by Php 200,000.

 

Two alternative solutions have been presented:

1. Borrow the Php 500,000 from a bank at 18%
2. Issue additional 2,500 shares of capital stock at the market price of Php 200 per share.

 

The tax rate is 32%

 

1) Which option is more preferred?

2) How much is the cost of capital?

3) How much is the tax benefit?