26. X Ltd. is in need of `10,00,000 for its new plant. It is expected that the plant would yield an EBIT of `1,60,000. In selecting the financial plans, the management of the company decides on the basis of maximum EPS. The company has the following three options of financing:

Option I: By raising debt of `1,00,000 and the balance by issuing equity shares.

Option II: By raising debt of `4,00,000 and the balance by issuing equity shares.

Option III: By raising debt of `6,00,000 and the balance by issuing equity shares.

The company’s share is currently selling at `25 but it is expected to decline to `20 when the amount of borrowed capital exceeds `5,00,000. Cost of debt is as follows:

Upto `1,00,000: 8%

Above `1,00,000 and up to `5,00,000: 12%

Above `5,00,000: 18%

Applicable tax rate is 50%. Which form of financing should the company choose?

Option I Option II Option III EAT 76,000 58,000 43,000 No. of equity shares 36,000 24,000 20,000 EPS 2.11 2.42 (Best) 2.15