The GT Limited is willing to expand its business for which it requires an additional finance of 50,00,000. At present, the capital structure of the…

Expected return on capital employed Capital Employed = Debt + Equity = (₹ 63,00,000 +54,00,000) + (₹ 70,00,000 +1,30,00,000) = 3,17,00,000 Return on capital employed/ROI = (EBIT / Capital employed) x 100 At present: = (54,00,000 / 3,17,00,000) x 100 = 17.03% Now company expects 2% more as ROI So, Expected ROI = 17.03% + 2% = 19.03% Proposed EBIT = Proposed Capital Employed x Return on capital employed = (₹ 3,17,00,000 +50,00,000) x 19.03% = 69,84,010 (i) Market Price per Share: Particular Financial Options Option – I 12% term loan of 50,00,000 Option II 1,00,000 equity shares @20 and 11% debentures of 30,00,000 (₹) (₹) EBIT 69,84,010 69,84,010 Less: Interest - 10% on old debentures 6,30,000 6,30,000 - 11% on new debentures - 3,30,000 - 12% on old term loan 6,48,000 6,48,000 - 12% on new term loan 6,00,000 - Total Interest 18,78,000 16,08,000 EBT 51,06,010 53,76,010 Less Tax @ 30% 15,31,803 16,12,803 EAT 35,74,207 37,63,207 No. of equity shares 7,00,000 8,00,000 Earnings per share 5.11 4.70 P/E ratio 10 10 Market Price per Share = EPS x P/E ratio 51.06 47.04 (ii) Recommendation: The option I is better and may be opted as both EPS and MPS are higher.