Answer to Question #284680 in Finance for LOVE

Question

Empire Ltd needs Rs 10,00,000 to build a new factory which will yield EBIT of 1,50,000 per year. The company has to choose between two alternative financing plans. 75% equity and 25% debt and 50% equity and 50% debt. Under the first plan the shares can be sold for Rs 50 per share and the interest rate on the debt will be 14%. Under the second plan shares can be sold for Rs 40 per share and the interest rate on debt will be 16%. Determine the EPS for each plan assuming a tax rate of 35%

Answer 1

Solution:

plan 1:

Equity=750000

Debt=250000

Number of shares = $\frac{750000}{40}=18750$

Interest rate=40000

=750000-250000-40000

Eps=$\frac{460000}{18750}=24.5$

Plan 2:

Equity=500000

Debt=500000

Number of shares=40000

Eps=$\frac{75000}{40000}=18.75$