LS2506: Goodyear Corporation has currently an ordinary share capital of Rs. 25 lakhs consisting of 25,000 shares of Rs. 100 each. The management is planning to raise another Rs. 20 lakhs to finance a major programme of expansion through one of the four possible financing plans.

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Question: Goodyear Corporation has currently an ordinary share capital of Rs. 25 lakhs consisting of 25,000 shares of Rs. 100 each. The management is planning to raise another Rs. 20 lakhs to finance a major programme of expansion through one of the four possible financing plans.

The options are:

(a)Entirely through ordinary shares.

(b)Rs. 10 lakhs through ordinary shares and Rs. 10 lakhs through long-term borrowings at 15% interest per annum.

(c)Rs. 5 lakhs through ordinary shares and Rs. 15 lakhs through long- term borrowings at 16% interest per annum.

(d)Rs. 10 lakhs through ordinary shares and Rs. 10 lakhs through preference shares with 14% dividend.

The company’s expected EBIT would be Rs. 8 lakhs. Assume a tax rate of 50%. You are required to

(i) calculate EPS under each alternative.

(ii) choose the best alternative, with reasons.

 


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