A company is contemplating to expand its business for which it will need a Capital Expenditure
Capital expenditure of ₹ 1.50 crores and working capital of ₹0.50 crore. The existing capital of the company consists of 30,00,000 shares ₹10 each.
The additional investment may be financed by issue of fresh share capital or borrowings @15% interest per annum from financial institutions or a combination of share capital and loan. The earnings before interest and taxes are likely to go up to ₹1,10,00,000 after the implementation of expansion plan. The company pays tax @ 35 per cent on earnings after paying interest.
Which source of financing should the company use for raising additional capital? Advise the company keeping in mind the EPS and financial risk.
Year of Exam- 2011
Question Paper -1
Question number-6-a
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