RQ Ltd. is planning an expansion program that will require Rs 30 crores and can be funded through one of the three options: (i)Issue further equity shares of Rs 100 each at par; (ii) Raise a 15% loan; and(iii) Issue 12% preference shares.

The present paid-up capital is Rs 60 crore and the annual EBIT is Rs 12 crores. The tax rate may be taken as 50%. After the expansion plan is adopted, the EBIT is expected to be Rs 15 crore.

Calculate the EPS under all the three financing options indicating the alternative giving the highest return to the equity shareholders. Also, determine the indifference point between the equity share capital and the debt financing.

Answer rating: 100% (QA)

EPS under equity financing Rs 15 crore 60 crore 100 Rs 025 EPS u... View the full answer