CHAPTER: 6 – CAPITAL STRUCTURE Q.5) The Modern Chemicals Ltd. requires 2500000 for a new plant. This plant is expected to yield earnings before interest and taxes of 500000. While deciding about the financial plan, the company considers the objectives of maximizing earnings per share. It has three alternatives to finance the project-by raising debt of 250000 or 1000000 or 1500000 and the balance in each case, by issuing equity shares. The company’s shares are currently selling at 150, but it expected to decline to 125 in case the funds are borrowed in excess of 1000000. The funds can be borrowed as under upto 250000 10% p.a., between 250001 to 1000000 15% p.a., between 1000001 and above 20% p.a. The tax rate applicable to the company is 40%. Which form of financing should the company choose? Ans: 1 2 3. EPS (a ÷ b) ` 19 ` 21.75 ` 19.69
Posted on: Tue, 03 Sep 2013 04:39:03 +0000
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