Question: Renart Co. Ltd has Equity Share Capital of $500,000 (face value $100 per share To meetteh expenditure of an expansion programme the company wishes to raise Rs 300,000 and ishaving the following four alternatives to raise the funds.
Plan A: To have full money from equity shares
Plan B:To have full money from equity and Rs 200 000 from borrowing from the financial Institution@10% p.a.
Plan C: Full money from borrowing @ 10% p.a.
Plan D: $100 000 in equity and $200 000 from preference shares at 8% p,a.
The company's earnings before interest and tax is $150,000 and the corporate tax is 50%
Required:
As a financial controller suggest which plan you would recommend the company to adopt?
part B
''In the world of no-tax, the firm cost of capitalis independent of it's capital '', Modigliani and miller(1958)
Discuss the above statement and provide appropriate illustrations.