Small bus Company is into manufacturing mini buses. Since its establishment it has seen a phenomenal growth in both its market share and…

Small bus Company is into manufacturing mini buses. Since its establishment it has seen a phenomenal growth in both its market share and profitability. The financial statements (Statement of P&L and Balance Sheet) are shown below. The company enjoys the confidence of its shareholders who have been rewarded with growing dividends year after year. Last year too, the company had announced 20 per cent dividend, which was the highest in the automobile sector. The company has never defaulted on its loan payments and enjoys a favourable face with its lenders, which include financial institutions, commercial banks and other private debenture holders. The competition in the bus industry has increased in the past few years and the company foresees further intensification of competition with the entry of several foreign bus manufacturers; many of whom are market leaders in their respective countries. The mini bus segment especially, will witness entry of foreign majors in the near future, with latest technology being offered to the Indian customer. Small bus company's management realises the need for large scale investment in upgradation of technology and improvement of manufacturing facilities to beat competition. While on one hand, the competition in the industry has been intensifying, on the other hand, there has been a slowdown in the Indian economy, which has not only reduced the demand for buses, but also led to adoption of price cutting strategies by various bus manufacturers. The Company needs - 3,12,50,000 for the investment in technology and improvement of manufacturing facilities. Company has three options for the funds: I The Company may issue 31,25,000 equity shares at 10 per share.II The Company may issue 15,62,500 equity shares at 10 per share and 1,56,250 debentures of 100denomination bearing an 9% rate of interest.III The Company may issue 15,62,500 equity shares at 10 per share and 1,56,250 preference shares at 100 per share bearing an 10% rate of dividend. The company's earnings before interest and taxes after investment is 37,50,000. Income tax rate applicable to the company is 40%. Based on the above facts, the management of the company asked you to answer the following questions (MCQs 1 to 5):