Calulation required for problem mentioned below - Reg

[SRINIVASARAO PEDDI]

It has to decided to raise ₹ 5,00,000 of additional capital funds and has identified two plans. The Information is as follows

Present Capital Structure : 3,00,000 equity shares of ₹ 10 each , 10% Bonds of 20,00,000

Tax Rate : 50%

Current EBIT : ₹ 17,00,000/-

Current EPS : ₹ 2.50

Current Market Price : ₹ 25 Per Share

Financial Plan I : 20,000 Equity shares @ ₹ 25 Per Share

Financial Plan II : 12% Debentures of ₹ 5,00,000

Find out which plan is better.

Please calculate and send me the solution on priority basis.

[DR.MARIAPPAN GOVINDARAJAN]

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AI Summary

Capital structure choice: compare equity issuance versus debt considering EPS impact and tax shield effects. Compare two financing alternatives-issuing equity versus issuing debentures-by calculating their effects on post financing earnings per share and on financial risk; equity issuance causes shareholder dilution, while debt creates fixed interest obligations that are partly offset by a tax shield, and the better plan is the one producing higher post financing EPS and acceptable leverage given the company's EBIT and tax rate.