AID12951: A company requires Rs 500,000 to construct a new plant. The feasible financial plans are as follows: (i) The Company may issue 25,000 common shares at Rs 10 per share and 2,500 debentures of Rs 100 denomination bearing an 8 per cent rate of interest. (ii) The Company may issue 50,000 common shares at Rs 10 per share. (iii) The Company may issue 25,000 common shares at Rs 10 per share and 2,500 preference shares at Rs 100 per share bearing an 8 per cent rate of dividend

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Question: A company requires Rs 500,000 to construct a new plant. The feasible financial plans are as follows: (i) The Company may issue 25,000 common shares at Rs 10 per share and 2,500 debentures of Rs 100 denomination bearing an 8 per cent rate of interest. (ii) The Company may issue 50,000 common shares at Rs 10 per share. (iii) The Company may issue 25,000 common shares at Rs 10 per share and 2,500 preference shares at Rs 100 per share bearing an 8 per cent rate of dividend.

If the company’s earnings before interest and taxes are Rs 10,000, Rs 20,000, Rs 40,000, Rs 60,000 and Rs 1,00,000, what are the earnings per share under each of the three financial plans? Which alternative would you recommend and why?

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