New Venture Limited is planning a plantation project costing Rs 300 crore. It is considering two financing
Question:
New Venture Limited is planning a plantation project costing Rs 300 crore. It is considering two financing alternatives. Under the first alternative, it can issue shares for Rs 50 worth Rs 200 crore and raise the remaining Rs 100 crore at 12%. Under the second alternative, it can issue shares worth Rs 150 crore again at a price of Rs 50 per share and raise the remaining Rs 150 crore by loan at 14%. The firm pays 30% tax. The returns from the project are extremely volatile and can be anywhere between 10% to 20% as a return on assets. This is one of the reasons management wants to issue a lesser number of shares till the revenue stabilizes.
a) Find out the EPS under both financing plans with return on asset varying from 10% to 20% in steps of 2.5%.
b) Explain the relationship of EPS with EBIT under both the financing plan.
c) What would you recommend if you are confident that the firm would achieve a return on assets of (i) b12.5% and (ii) 17.5%
d) At what level of EBIT, two financing options are indifferent to EPS?
Operations management processes and supply chain
ISBN: 978-0136065760
9th edition
Authors: Lee J Krajewski, Larry P Ritzman, Manoj K Malhotra