EBIT EPS NUMERICAL

A company needs Rs. 5, 00,000 for the construction of new plant. Following alternative capital structures are under consideration:
The company may issue 50,000 equity shares of Rs 10 per share at par The company may issue 2,500 debentures of Rs 100 per debenture carrying an interest of 12% p.a. and balance by way of equity shares of Rs 10 per share issued at par. The company may issue 2500 preference shares of Rs 100 per share carrying the rate of dividend of 10% and balance by way of equity shares of Rs 10 issued at par.

The companys EBIT is Rs 80,000 and the objective of the company is to maximize EPS, which of the capital structures will be recommended? Tax rate is 50%

 The existing capital structure of ABC company is as follows:

Equity shares of par value Rs 100 Retained Earnings 9% Preference shares 7% Debentures Rs 40,00,000 Rs. 10,00,000 Rs. 25,00,000 Rs. 25,00,000

The existing rate of return on capital employed is 12% and the income tax rate is 50%. The company requires a sum of Rs. 25, 00,000 to finance its expansion programme for which it is considering the following alternatives: Issue of 20,000 equity shares at a premium of Rs 25 per share Issue of 10% preference shares Issue of 8% debentures P/E ratios in the case of equity, preference and debenture financing would be 20, 17 and 16 respectively. Which of the following alternatives would you consider best if objective of the company is to maximize market price of shares?