ER Private Limited has a paid-up capital - 2,50,000 consisting of 25,000 Equity shares of 10 each. The Market price per share is 24with PE ratio of…

Calculation of No. of Equity Shares and Existing Earnings before Interest and Taxes Particulars Existing Alternative A: Issue Equity shares only Alternative B: Issue Equity Shares and 12% Debentures of equal amount Number of Equity Shares Existing 25,000 25,000 25,000 Newly issued 25,000 (₹ 5,00,000 / (₹ 10+10)) 12,500 (₹ 2,50,000 / (₹ 10+10)) Total no. of Equity Shares 25,000 50,000 37,500 Calculation of Existing Earnings before Interest and Taxes (EBIT) Market Price per share (MPS) 24 Price-Earnings Ratio (PE Ratio) 8 times 8 times 7 times Earning per share (EPS) = MPS/PE Ratio 3 Earnings after Tax (EAT) = EPS x No. of Equity shares 75,000 Earning before Tax (EBT) = EAT/0.6 (or EBIT as Interest nil) 1,25,000 Calculation of EPS and MPS under two financial alternatives Particulars Existing Alternative A Alternative B Earnings before Interest and Tax: Existing EBIT 1,25,000 1,25,000 1,25,000 From New Project 2,00,000 2,00,000 1,25,000 3,25,000 3,25,000 Less: Interest on 12% Debentures - 30,000 Earnings before Tax (EBT) 1,25,000 3,25,000 2,95,000 Less: Tax @ 40% 50,000 1,30,000 1,18,000 Earnings after Tax (EAT) 75,000 1,95,000 1,77,000 EPS = EAT/ No. of Equity Shares 3.00 3.90 4.72 Market Price per share (MPS) = EPS x Price-Earning Ratio 24.00 31.20 33.04 Advise: Alternative B i.e., issue of 12% Debentures is most suitable to maximize the market price per share. Alternatively, Solution can also be presented in following way: Calculation of EPS and MPS under two financial alternatives Particulars Existing Alternative A Alternative B Earnings before Interest and Tax: From New Project 2,00,000 2,00,000 Less: Interest on 12% Debentures - 30,000 Earnings before Tax (EBT) 2,00,000 1,70,000 Less: Tax @ 40% 80,000 68,000 Earnings after Tax (EAT) from new project 1,20,000 1,02,000 Earnings from Existing (PAT) 75,000 75,000 75,000 Total Earnings After Tax (EAT) 75,000 1,95,000 1,77,000 Number of Shares 25,000 50,000 37,500 EPS = EAT/ No. of Equity Shares 3.00 3.90 4.72 Market Price per share (MPS) = EPS x Price-Earning Ratio 24.00 31.20 33.04 Advise: Alternative B i.e., issue of 12% Debentures is most suitable to maximize the market price per share.