. Tendulkar Cricket Bat Company currently has fixed operating costs of 30 lakhs a year, variable operating costs are 80% of sales and per bat sale price is 1500. Further, the company presently has 12% debt outstanding worth 30 lakhs, 800,000 shares of common stock outstanding and is subject to 40% tax. It is willing to finance a 40 lakhs expansion program and is considering three alternatives: additional 14% debt (option I), 12% preferred stock (option II), or issue of common stock at 16 per share (option III).

1. At its current production and sales level of 16,000 bats, what would be earnings per share (EPS) under each of the three alternatives (operating profits are assumed to remain constant)? Which alternative do you prefer?

2. What is the degree of financial leverage (DFL) for each alternative at the expected EBIT level of 18 lakhs?

3. Determine the break-even EBIT/indifference point between the debt plan (option I) and the common stock plan (option III). How much increase in level of EBIT is required where EPS is same for options I and III?