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ABC Ltd has an existing equity share capital of Rs 70 lacs comprising of equity shares of face value Rs 10 each. The company has

ABC Ltd has an existing equity share capital of Rs 70 lacs comprising of equity shares of face value Rs 10 each. The company has decided to invest in a project that requires an outlay of Rs 100 lacs. These required funds can be raised, either by:

a) issuing fresh equity shares at par value, or

b) through debentures at 10% interest

The probability distribution of EBIT of ABC Co, for various economic scenarios, is given below:

Economic Scenario

Probability

Projected EBIT (Rs lacs)

Best case

0.10

25

Growth case

0.15

22

Normal case

0.55

18

Slowdown case

0.15

10

Recession

0.05

05

Which of the two options of funding will you suggest to the company? Find the indifference EBIT of the firm as well.

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