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What would be EPS for the three alternative

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Question - Geo. Tech Ltd. presently has Rs. 36,00,000 in 10% debt outstanding. If wishes to finance a Rs. 40,00,000 expansion programme and is considering three alternatives: additional debt at 12% interest, Preference shares with an 11% dividend, and the sale of equity shares at Rs. 16 per share. The company presently has 8,00,000 shares of Equity shares outstanding and is in a 40% tax bracket.

a. If EBIT are presently 15,00,000, what would be EPS for the three alternative, assuming no immediate increase in profitability?

b. What is the indifference point mathematically between debt and equity? Also find out the financial break-even level.

c. Which alternative do you prefer? How much would EBIT need to increase before the next alternative would be best?

Reference no: EM132720503

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