Question
The Rising Sun Company requires Rs. 24 crores for installing a new assembly line. This investment is expected to yield an annual EBIT of Rs. 4 crores. The objective of investment by the company is to maximise the Earnings Per Share. Various alternatives which the company is considering are issuing of equity shares and raising a debt of either Rs. 4 crores, 6 crores or 20 crores. The current market price per share is Rs. 80. Which is expected to drop to Rs. 50 per share if the borrowing is in excess of Rs. 7.5 crores. Cost of borrowing are as follows:
Answer :
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To evaluate the best financing option for The Rising Sun Company in terms of maximizing Earnings Per Share (EPS), we need to analyze the different capital structure alternatives: all-equity financing or combinations of equity and debt. The company requires ₹24 crores for a new assembly line, with an expected EBIT of ₹4 crores annually. Here are the scenarios being considered: Alternatives for Financing: 1. All Equity (₹24 crores) 2. ₹4 crores Debt + ₹20 crores Equity 3. ₹6 crores Debt + ₹18 crores Equity 4. ₹20 crores Debt + ₹4 crores Equity ### Assumptions: * EBIT = ₹4 crores annually * Tax rate = 30% (assumed standard corporate tax rate) * Current market price per share = ₹80, but will drop to ₹50 if borrowing exceeds ₹7.5 crores * Cost of Debt: * Up to ₹5 crores → 10% * ₹5 to ₹10 crores → 14% * Above ₹10 crores → 18% Now, we will evaluate each option using the EPS = (EBIT – Interest – Tax) _________ ____ _________ ________ _______ ______ _______ ______.
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To evaluate the best financing option for The Rising Sun Company in terms of maximizing Earnings Per Share (EPS), we need to analyze the different capital structure alternatives: all-equity financing or combinations of equity and debt. The company requires ₹24 crores for a new assembly line, with an expected EBIT of ₹4 crores annually. Here are the scenarios being considered: Alternatives for Financing: 1. All Equity (₹24 crores) 2. ₹4 crores Debt + ₹20 crores Equity 3. ₹6 crores Debt + ₹18 crores Equity 4. ₹20 crores Debt + ₹4 crores Equity ### Assumptions: * EBIT = ₹4 crores annually * Tax rate = 30% (assumed standard corporate tax rate) * Current market price per share = ₹80, but will drop to ₹50 if borrowing exceeds ₹7.5 crores * Cost of Debt: * Up to ₹5 crores → 10% * ₹5 to ₹10 crores → 14% * Above ₹10 crores → 18% Now, we will evaluate each option using the EPS = (EBIT – Interest – Tax) _________ ____ _________ ________ _______ ______ _______ ______.
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