Questions.1(10 Marks)

ABC Ltd. needs Rs 500 lacs for an expansion plan that is expected to yield 15% return on assets. Currently its return on asset is 12% and the firm is all equity funded. For expansion it has alternatives of funding the entire expenditure either through debt or equity. Following information is available:

Nos. of shares already existing20 lacs

Price at which the shares can be issued (Rs)Rs 50

Existing interestRs 30 lacs

Interest rate on debt10%

Tax rate40%

Find out the new EPS with equity and debt financing. Also find at what level of earnings the firm is indifferent to mode of financing.