question archive A Company’s capital structure consists of the following: Equity Share of Rs
A Company’s capital structure consists of the following: Equity Share of Rs
Subject:FinancePrice: Bought3
A Company’s capital structure consists of the following:
Equity Share of Rs.100 each Rs.40 lakhs
Retained Earnings Rs.20 lakhs
9%Preference Shares Rs.24 lakhs
7%Debentures Rs.16 lakhs
Total Rs.100 lakhs
The company earns 12% on its capital. The income-tax rate is 50%. The
company requires a sum of Rs.50 lakhs to finance its expansion programme for
which the following alternatives are available to it:
a) Issue of 40,000 equity shares at a premium of Rs.25 per share.
b) Issue of 10% preference shares.
c) Issue of 8% debentures.
It is estimated that the P/E ratios in the cases of equity, preference and
debenture financing would be 43, 34 and 35 respectively.
Which of the three financing alternatives would you recommend and why?
