In the business world today, all companies are facing the challenge of expansion. Calex Ltd is one such company and it would like to raise Kshs. 1 million for expansion. The expansion is expected to yield annual earnings before interest and tax of Kshs 160,000. One of Calex Ltd objectives is maximizing the earnings per share. It is considering the possibility of issuing equity shares and raising debt of Kshs. 100,000, or Kshs. 400,000 or Kshs. 600,000. The current market price per share is Kshs. 25 and is expected to drop to Kshs. 20 if the funds are borrowed in excess of Kshs. 500,000. Funds can be borrowed at the rates indicated below:
|
Amount (Kshs.)
|
Interest
|
|
100,000
|
8%
|
|
Over 100,000 up to 500,000
|
12%
|
|
Over 500,000
|
18%
|
Assume a tax rate of 50%.
Required
a) Determine the EPS for the three financing alternatives .
b) Advice on the best financial alternative among the three options. Explain.