COMPREHENSIVE PROBLEM:

JV Manufacturing Inc. is a mid$-$sized company specializing in the production of high$-$tech components for

the automotive industry. The company has experienced steady growth over the past five years and is

looking to expand its operations by building a new production facility to meet increasing demand. The

new facility is expected to cost P$50$ million.

The company currently has P$20$ million in equity with a book value of P$10$ million in retained earnings.

The company has existing long$-$term debt of P$15$ million with an average interest rate of $5\%.$

The new facility is expected to generate an additional P$15$ million in annual revenue and P$4$ million in

annual net profit. The company aims to fund the expansion either through debt financing or equity

financing.

The company has $1,00,000$ current shares outstanding. If it secures new debt, the company will be

granted a $6\%$ interest rate. If it issues shares, the issuance of new shares will dilute the existing

ownership by $20\%.$

If you are the financial manager of the company, what will be the optimal financing structure for the P$50$

million expansion project?

CLUE:

You can use the following formula as your guide:

Earnings Per Share $=$ Net Income$/[$# of Outstanding Shares $(1-$ Dilution rate$)]$