Paramount Products Ltd$.$ wants to raise Rs$.100$ lac for diversification project. Current estimates of EBIT from the new project are Rs$.22$ lac p$.$a$.$

Cost of debt will be $15\%$ for amounts upto and including Rs$.40$ lac $16\%$ for additional amounts up to and including Rs$.50$ lac and $18\%$ for additional amounts above Rs$.50$ lac.

The equity shares $($face value of Rs$.10)$ of the company have a current market value of Rs$.40.$ This is expected to fall to Rs$.32$ if debts exceeding Rs$.50$ lac are raised. The following options are under consideration of the Co$.$

Option Debt Equity

I $50\%50\%$

II $40\%60\%$

III $60\%40\%$

Determine EPS for each option and state which option should the Co$.$ adopt. Tax rate is $50\%.$

explain in detail each step