1. The present capital structure of a company is as follows

Equity share capital (face value per share Rs.10) 10000

8% Preference Share Capital 5000

9% Non convertible Debentures 5000

11% Term loans 10000

Its present return on capital employed is 25%

The present market price per share is Rs.100

The rate of corporate tax is 25%

It has a proposal under consideration which require additional financing to the extent of 50% of its existing capital employed. An investment in this proposal is expected to increase the return on capital employed to 35% of the total capital employed. The following alternative modes of investment are under consideration.

	Proportion of new investment	Proportion of new investment	Proportion of new investment	Proportion of new investment
Issue of equity shares of face value of Rs.10 at at the existing market price	50	40	25	30
9% Preference Share equity	10	15	25	20
10% Non convertible Debentures	20	15	25	15
12% Long term Loans	20	30	25	35
P/E Ratio	10	8	7	7

The management would like to adopt the alternative which will maximise the wealth of the shareholders. Keeping this objective in mind decide the best alternative. (10 Marks)