Q. 1(A). Empire Limited needs 10,00,000 to build a new factory which will yield EBIT of

150000 per year. The company has to choose between two alternative financing plans: 75

percent equity and 25 per cent debt or 50 per cent equity and 50 per cent debt. Under the first

plan shares can be sold at 50 per share, and the interest on debt will be 14 per cent. Under the

second plan shares can be sold for 40 per share and the interest rate on debt will be 16 per

cent. Which plan is better and why? Assume a tax rate of 35 percent.

Q. 1(B). For XYZ limited the following data is given:

EBIT 200

Contribution 400

Interest 100

If the companys sales are expected to decline by 5 per cent, determine DOL, DFL and DCL.

What do you interpret from your answer about the risk of the firm? explain each step and elaborate