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Question One Kabwe Investment needs K3,000,000 for the installation of a new factory. The new factory expects to yield annual earnings before interest and tax
Question One Kabwe Investment needs K3,000,000 for the installation of a new factory. The new factory expects to yield annual earnings before interest and tax (EBIT) of K500.000. In choosing a financial plan, Kabwe Investment has an objective of maximizing earnings per share (EPS). The company proposes to issuing ordinary shares and raising debit of K300,000 and K1,000,000 of K1,500,000. The current market price per share is 250 and is expected to drop to K200 if the funds are borrowed in excess of K1, 200,000. Funds can be raised at the following rates. -up toK300,000 at 8% -over K300,000 to K1, 500,000 at 10% -over K1, 500,000 at 15% Assuming a tax rate of 50% Required Advise Kabwe Investment which financial plan that will maximize earnings per share (EPS)? [20 Marks]
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