Question

Organic Ltd: is a company engaged in production of organic foods. Presently, it sells its products through indirect channels of distribution. But, considering the sudden surge in the demand for organic products, the company is now inclined to start its online portal for direct marketing. The financial managers of the company are planning to use debt to take advantage of trading on equity. In order to finance its expansion plans, it is planning to ‘raise a debt capital of Rs. 40 lakhs through a loan @ 10% from an industrial bank. The present capital base of the company comprises of Rs. 10 lakh equity shares of Rs. 15 each. The rate of tax is 35%. In the context of the above case:

1. What are the two conditions necessary for taking advantage of trading on equity?
2. Assuming the expected rate of return on investment to be same as it was for the current year i.e., 15%, do you think the financial managers will be able to meet their goal. Show your workings clearly.​

Answer 1

Answer:

is my answer is correct

Explanation:

Healthcare Ltd. is a company engaged in production of organic food. Presently it sells its products through indirect channels of distribution. ... Company plans to raise debt capital of 40 lakhs through a loan from ICICI bank at 10% Interest. The present capital base of the company is 9 lakhs equity shares of 10 each.