Vedansh Limited has a share capital of ₹10,00,000 divided into shares of ₹100 each .For
expansion purpose ,the company requires additional funds of ₹ 5,00,000 . The management is
considering the following alternatives for raising funds :
Alternative 1: Issue of 5000 Equity shares of ₹100 each
Alternative 2: Issue of 10% Debentures of Rs. 5,00,000
The company’s present Earnings Before Interest and Tax ( EBIT) is ₹4,00,000 p.a. Assuming that
the rate of Return of Investment remains the same after expansion, which alternative should be
used by the company in order to maximize returns to the equity shareholders . The tax rate is 50%. Show the working.