Value-Add Enterprises Ltd. has a capital structure comprising exclusively of equity shares amounting to Rs. 10, 00,000. To fund its expansion plans, he company now wishes to raise an additional Rs. 5,00,000. It is considering among the following three alternatives: (i) Raise the entire expansion money as equity share capital itself (ii) Raise 50% as Equity Share Capital and balance as 10% Debentures (iii) Keep Equity constant and raise 60% as 10% Debentures and balance as 12% Preference Share Capital. The market price per share is 100 and it is assumed it will remain same under all the financing plans. The firm therefore wishes to use EPS as the basis to select the right financial plan. Given a tax rate of 40%, which plan would you recommend to the firm?
Value-Add Enterprises Ltd. has a capital structure comprising exclusively of equity shares amounting to Rs. 10, 00,000. To fund its expansion plans, he company now wishes to raise an additional Rs. 5,00,000.
It is considering among the following three alternatives:
(i) Raise the entire expansion money as equity share capital itself
(ii) Raise 50% as Equity Share Capital and balance as 10% Debentures
(iii) Keep Equity constant and raise 60% as 10% Debentures and balance as 12%
The market price per share is 100 and it is assumed it will remain same under all the financing plans. The firm therefore wishes to use EPS as the basis to select the right financial plan.
Given a tax rate of 40%, which plan would you recommend to the firm?
Step by step
Solved in 5 steps
