Question

Q4. (a) Premji Steels Limited requires Rs. 25,00,000 for a new plant. This plant is expected to
yield earnings before interest and taxes of Rs.5,00,000. While deciding about the financial
plan, the company considers the objective of maximizing earnings per share. It has three
alternatives to finance the project - by raising debt of Rs. 2,50,000 or Rs.10,00,000 or Rs.
15,00,000 and the balance, in each case, by issuing equity shares.
The company's share is currently selling at Rs. 150, but is expected to decline to Rs.125 in
case the funds are borrowed in excess of Rs.10,00,000. The funds can be borrowed at the
rate of 10 percent up to Rs.2,50,000, at 15 percent over Rs. 2,50,000 and up to Rs. 10,00,000
and at 20 percent over Rs.10,00,000. The tax rate applicable to the company is 50 percent.
Which form of financing should the company choose?
(b)Determine the indifference points of the financial plans (1) A and B and (2) A and C
formulated by the finance department of the company to finance its capital budget, assuming
50% corporate tax rate:
(A) Issue 1,00,000 equity shares of Rs. 20 per
share.
(B) Issue 50,000 equity shares of Rs 20 per share and 10% debentures of Rs
10,00,000.
(C) Issue 50,000 equity shares of Rs 20 per share and 12% preference shares of Rs
10,00,000.
(9,9.75)​

Answer 1

Answer:

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