Effects of leverage to return on ordinary equity You are in the process of organizing a new company to produce and sell a lady beauty product You feel that P5 million would be enough to finance the new company's operations You are considering following financing mix in raising the needed money for investment

Straight ordinary equity: All the P5 million would be raised by issuance of ordinary shares

Shareholders' equity mix: P3 5 million would be raised from ordinary shares issuances and P1.5 million from the sale of P100 pr 10% preference share

Leverage and equity mix: P30 million would be obtained from ordinary shares Issuances and P2.0 million from issuance of a 12% bonds payable

You estimated that the operations would generate an earning of P2 million each year before interest and taxes The tax rate is 40%

Requirement: Determine the best financing mix that would maximize return on ordinary equity