A company has assets of Rs 100000 financed wholly by equity share capital. There are 100000 shares outstanding with a book value of Rs 10per share. Last year's profit before taxes was Rs 250000 the tax rate is 35 per cent. The company is thinking of an expansion programme that will cost Rs 500000. The financial manager considers three financing plans:
1. Selling 50000 shares at Rs 10 each.
2. Borrowing Rs 500000 shares at an interest rate of 14 per cent
3. Selling Rs 500000 of preference shares with a dividend rate of 14 per cent.
The profit before interest and tax are estimated to be Rs 375000 after expansion.
Required to calculate:
a. The after tax rate of return on assets.
b. The earnings per share
c. The rate of return on shareholder's equity for each of the three financing alternatives.
d. Suggest which alternative should be accepted by the firm.
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Answer:
I think it is..........3.75000..........
Explanation:
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