company’s present capital structure consists of 20,000,000 shares of equity stock. It requires Rs. 100,000,000 of external financing for which it is considering three alternatives:
A. Issue 5,000,000 equity shares of Rs 10 par at Rs 20 each
B. Issue 3,000,000 equity shares of Rs 10 par at Rs 20 each and 4,000,000 preference shares of Rs 10 par carrying 11 percent dividend
C. Issue 1,000,000 equity shares of Rs 10 par at Rs 20 each and Rs 80 million debentures carrying 14 percent interest rate.
The company’s tax rate is 40%.
(i) What is the EPS-EBIT equation for the three alternatives?
(ii) What is the EPS-EBIT indifference point for the three alternatives A & B?