AURO Engineering Pvt. Ltd. is engaged in the manufacturing of industrial machinery and heavy engineering equipment used in infrastructure,…

AURO Engineering Pvt. Ltd. is engaged in the manufacturing of industrial machinery and heavy engineering equipment used in infrastructure, automobile, and renewable-energy projects. Over the last few years, the company has achieved stable growth in revenues and profitability due to increasing demand from domestic and export markets. The management is presently evaluating its long-term financing strategy in view of its proposed expansion into high-capacity precision engineering equipment. The General Manager - Finance of the company CA Jenisha K informed the Board of Directors that the company has been maintaining a balanced capital structure consisting of equity shares, preference shares, and long-term debentures. However, with the proposed expansion plans, the company is considering additional debt financing to take advantage of financial leverage and tax benefits associated with debt capital. As on 31st March, 2026, the company had the following capital structure at book values: Particulars Amount (₹) Equity Share Capital (1,00,00,000 shares) 30,00,00,000 11.5% Preference Shares 6,00,00,000 10% Debentures 10,00,00,000 Total Capital Employed 46,00,00,000 The equity shares of the company are currently quoted at ₹300 per share in the stock market. The company expects to pay a dividend of ₹15 per equity share next year, and the dividend is expected to grow at a constant rate of 5% per annum indefinitely. The applicable corporate tax rate for the company is 35%. The management is now considering raising additional debt of ₹5,00,00,000 by issuing 12% debentures. The Finance Director expects that the proposed increase in financial leverage may improve shareholders' returns in the short run. As a result of the revised financing plan, the expected dividend per share is estimated to increase to ₹20 per share, while the dividend growth rate is expected to remain unchanged at 5% per annum. However, due to increased financial risk arising from higher leverage, the market price of the company's equity shares is expected to decline to ₹250 per share. The Board of Directors has requested the finance team to evaluate the impact of the proposed financing decision on the company's overall cost of capital and advise whether the revised capital structure would be financially beneficial for the company. You are required to answer the following the questions: