Question 3

Naveed SAOG finances their all projects by using both owned and borrowed capital. It includes the following combination:

Ordinary shares	10000 shares of OMR 5.100 each
8%-Debentures	15000 debentures of OMR 10.500 each

(a) Identify the differences between owned capital and borrowed capital by referring to the information above and other sources of owned capital and borrowed capital.

Naveed SAOG is considering two plans to buy a new machine for OMR 200000. Plan A involves issuance of 50000 shares of common stock at the current market price of OMR 3 per share and 10000 shares at OMR 5 per share. Plan B involves issuance of OMR 150000, 12% bonds and OMR 50000, 24% debentures at face value.

Income before interest and taxes on the new machine will be OMR 300000. Income taxes are expected to be 25%. Naveed SAOG currently has 10000 shares of common stock outstanding and Interest-bearing bonds of OMR 25000 at a rate of 9% per year.

(b) Calculate basic Earnings Per Share (EPS) under the both plans and select the best cause of action from the viewpoint of existing shareholders.