A Company's capital structure consists of the following: Equity Share of Rs.100 each Retained Earnings 9%Preference Shares 7%Debentures Total Rs.40 lakhs Rs.20 lakhs Rs.24 lakhs Rs.16 lakhs Rs. 100 lakhs The company earns 12% on its capital. The income-tax rate is 50%. The company requires a sum of Rs.50 lakhs to finance its expansion programme for which the following alternatives are available to it: a) Issue of 40,000 equity shares at a premium of Rs.25 per share. b) Issue of 10% preference shares. c) Issue of 8% debentures. It is estimated that the P/E ratios in the cases of equity, preference and debenture financing would be 43, 34 and 35 respectively. Which of the three financing alternatives would you recommend and why?
A Company's capital structure consists of the following: Equity Share of Rs.100 each Retained Earnings 9%Preference Shares 7%Debentures Total Rs.40 lakhs Rs.20 lakhs Rs.24 lakhs Rs.16 lakhs Rs. 100 lakhs The company earns 12% on its capital. The income-tax rate is 50%. The company requires a sum of Rs.50 lakhs to finance its expansion programme for which the following alternatives are available to it: a) Issue of 40,000 equity shares at a premium of Rs.25 per share. b) Issue of 10% preference shares. c) Issue of 8% debentures. It is estimated that the P/E ratios in the cases of equity, preference and debenture financing would be 43, 34 and 35 respectively. Which of the three financing alternatives would you recommend and why?
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:A Company's capital structure consists of the following:
Equity Share of Rs.100 each
Retained Earnings
9%Preference Shares
Rs.40 lakhs
Rs.20 lakhs
Rs.24 lakhs
7%Debentures
Rs.16 lakhs
Total
Rs.100 lakhs
The company earns 12% on its capital. The income-tax rate is 50%. The
company requires a sum of Rs.50 lakhs to finance its expansion programme for
which the following alternatives are available to it:
a) Issue of 40,000 equity shares at a premium of Rs.25 per share.
b) Issue of 10% preference shares.
c) Issue of 8% debentures.
It is estimated that the P/E ratios in the cases of equity, preference and
debenture financing would be 43, 34 and 35 respectively.
Which of the three financing alternatives would you recommend and why?
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