Paramount Products Ltd. wants to raise Rs. 100 lakh for diversification project. Current

estimates of EBIT from the new project is Rs. 22 lakh p.a.

Cost of debt will be 15% for amounts up to and including Rs. 40 lakh, 16% for additional

amounts up to and including Rs. 50 lakh and 18% for additional amounts above Rs. 50 lakh.

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 lakh are raised. The

following options are under consideration of the company.

Option Debt Equity

I 50% 50%

II 40% 60%

III 60% 40%

Determine EPS for each option and state which option should the Company adopt.

Tax rate is 50%.