Illustration 18. A company's capital structure consists of the following: Equity Share of Rs. 100 each Retained Earnings 9% Preference Shares 7% Debentures Total Rs. 20 lakhs Rs. 10 lakhs Rs. 12 lakhs Rs. 8 lakhs Rs. 50 lakhs The company earns 12% on its capital. The income tax rate is 50%. The company requires a sum of Rs. 25 lakh to finance its expansion programme for which the following alternatives are available to it (1) Issue of 20.000 equity shares at a premium of Rs. 25 per share. (ii) Issue of 10% preference shares. (iii) Issue of 8% debentures. It is estimated that the P/E ratios in the cases of equity, preference and debenture financing would be 21.4, 17 and 15.7 respectively. Which of the three financing alternatives would you recommend and why