Jessica wanted to start her own company instead of working for someone else. She had been thinking about different low-risk ventures she can start with minimal capital. She realized that she has always enjoyed making jewelry. Her friends loved the bracelets she made for them. She thought, There are so many people doing the same thing, what will make my bracelets special? After talking to some local craftspeople, she came up with the idea of a woven horsehair bracelet with a bead of recycled glass in the center. She can get the beads from a local artist ($20 for 100 beads), horsehair from her uncles farm for free, and gift boxes cost 25 each. She recently bought a weaving loom with a bank loan for $500 and is making monthly payments of $25 to the bank. Jessica's sister has agreed to help her weave the bracelets at a cost of 50 per bracelet made. Jessica's rent is $250 per month and she pays $40 per month for phone and Internet charges. After pricing similar bracelets, she decided she could sell the bracelets to the retail shops in her town (a vacation spot for tourists) for $6.50 each. What is the minimum number of bracelets she should make before starting to make profits?
Over the years, Jessica's product becomes popular and she wants to expand the business. Suppose her firm has a capital structure exclusively comprising of ordinary shares amounting to $ 10,00,000. She now wishes to raise an additional $ 10,00,000 for expansion.
She has four alternative financial plans:
It can raise the entire amount in the form of equity capital.
It can raise 50 percent as equity capital and 50 percent as 5% debentures.
It can raise the entire amount as 6% debentures.
It can raise 50 percent as equity capital and 50 percent as 5% preference capital.
Further, assume that the existing EBIT is $ 1,20,000, the tax rate is 35 percent, outstanding ordinary shares are 10,000 and the market price per share is $ 100 under all the four alternatives. Which financing plan should the firm select? Base your answer on EPS analysis.