CASE STUDY: 3

Paramount Products SAOG wants to raise OMR 100 Million for diversification project. Current estimates of EBIT from the new project OMR 22 Million p.a. the cost of debt will be 15% for amounts up to and including OMR 40 Million, 16% for additional amounts up to and including OMR 50 Million and 18% for additional amounts above OMR 50 Million. The equity shares (face value of OMR 10) of the company have a current market value of OMR 40. This is expected to fall to OMR 32 if debts exceeding OMR 50 Million are raised. The following options are under consideration of the company.

Option	Debt	Equity
I	50 per cent	50 per cent
II	40 per cent	60 per cent
III	60 per cent	40 per cent

Determine EPS for each option and state which option should the Company adopt. Tax rate is 50%. (5 Marks)