Financial Management DPT-PU-6 Sales Rs. 45,00,000 (Production capacity of Rs. 60,00,000 at current sale price) Fixed cost Variable cost (66 2/3%) - 5,00,000 - 30,00,000 EBIT 10,00,000 Interest 1,00,000 Earning before taxes Income tax (50%) 6257 9,00,000 - 4,50,000 19.50 Net income 4,50,000 EPS= Rs. 9 The expansion program is estimated to cost Rs. 5,00,000. If this is financed through debt, the rate on the new debt will be 10% and the P/E ratio will be 10 times. If expansion program is financed through Equity, the new shares can be sold at Rs. 100/- share and the P/E ratio will be 12 times. Expansion will generate additional. sales of Rs. 12,00,000. No additional fixed cost would be needed to meet the expansion operation. If the company is to follow a policy of maximizing the market value of its shares, which form of financing the company should employ? (Marks 15) Ans. [ Company should employ equity form of financing ] Hint. [ M.V., per share- In case of financing by Debts Rs. 111.67; In case of financing by Equity Rs. 127.27] illustration Financial Management DPT-PU-6 Sales Rs. 45,00,000 (Production capacity of Rs. 60,00,000 at current sale price) Fixed cost Variable cost (66 2/3%) - 5,00,000 - 30,00,000 EBIT 10,00,000 Interest 1,00,000 Earning before taxes Income tax (50%) 6257 9,00,000 - 4,50,000 19.50 Net income 4,50,000 EPS= Rs. 9 The expansion program is estimated to cost Rs. 5,00,000. If this is financed through debt, the rate on the new debt will be 10% and the P/E ratio will be 10 times. If expansion program is financed through Equity, the new shares can be sold at Rs. 100/- share and the P/E ratio will be 12 times. Expansion will generate additional. sales of Rs. 12,00,000. No additional fixed cost would be needed to meet the expansion operation. If the company is to follow a policy of maximizing the market value of its shares, which form of financing the company should employ? (Marks 15) Ans. [ Company should employ equity form of financing ] Hint. [ M.V., per share- In case of financing by Debts Rs. 111.67; In case of financing by Equity Rs. 127.27] illustration