Sinclair Corporation has approached its investment banker to raise Tk 2,50,000 in new capital.The investment banker advised Sinclair that (Option 1) if new bonds are issued, they need to carry an interest rate of 14 percent.Alternatively, (Option 2) the amount may be raised by selling shares each share netting Tk 16.Currently, Sinclair has 72,000 shares outstanding and has debt amounting to Tk 9,00,000 carrying an interest rate of 12 percent.The tax rate is 27 percent.

(a)Prepare table showing the EPS values assuming (A) Tk 2,50,000 is raised by selling new common shares.Use EBIT values of Tk 4,50,000 and Tk 6,00,000.

(b)Prepare table showing the EPS values assuming (B) Tk 2,50,000 is raised by selling new bonds.Use EBIT values of Tk 4,50,000 and Tk 6,00,000.

(c)Compute the indifference point.

(d)Draw a chart and identify the range where the equity issue is preferred to the debt issue.

Answer rating: 100% (QA)

a Table showing EPS if Tk 250000 is raised by issuing new shares Option 1A EB... View the full answer