A co.'s present capital structure contain 10, 00,000 equity shares and 60,000 preference shares. Thefirm's current EBIT is Rs. 6.4 million. Preference shares carry a dividend of Rs. 8 per share. The tax rateof the co. is 50%. The EPS is Rs. 2.72. The firm is planning to raise Rs. 10 million of external financing.
Two financing alternatives are being considered.
(i) Issuing 10, 00,000 equity shares of Rs. 10 each.
(ii) Issuing debenture for Rs. 10 million carrying 14% interest.
a. Suggest the co. the alternative that maximizes the EPS of the firm.
b. Compute the EPS-EBIT indifference point.