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Which financing plan should the firm select and why

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Reference no: EM133101838

Question - Suppose a firm has a capital structure exclusively comprising of ordinary shares amounting to 10,00,000. The firm now wishes to raise additional ?10,00,000 for expansion. The firm has four alternative financial plans:

(A) It can raise the entire amount in the form of equity capital.

(B) It can raise 50 per cent as equity capital and 50 per cent as 5% debentures.

(C) It can raise the entire amount as 6% debentures.

Further assume that the existing EBIT are 1,20,000, the tax rate is 35 per cent, outstanding ordinary shares 10,000 and the market price per share is ?100 under all the four alternatives.

Which financing plan should the firm select and why?

Reference no: EM133101838

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