The capital structure of Richard Company Ltd consists of an ordinary share capital of Rs. 2,500,000 (face value Rs 100 per share). The company is in the business of Aluminum production. To meet the expenditure of an expansion Programme, the company wishes to raise Rs. 2,000,000. Within the board of directors there is a discussion about the optimal financing choice. Mr. Bale, the CFO, prefers debt financing since this increases the firm's profit per share, and, thus, the value of the shares. He took up the matter with the consultants of the company. They explained to Mr. Bale that if the objective of the firm is the maximization of shareholder wealth, then the debt to equity ratio does not matter. However, their comment holds in a world of no taxes. They argued that in a world with tax, it is best to 'gear-up' the company as high as possible. Now the CFO may not know much about theories of financing decisions but he knows that there are limits to which the debt level is desirable. Richard Company Ltd is having the following four alternatives to raise the funds: (a) Entirely through ordinary shares. (b) Rs.1,000,000 through ordinary shares and Rs.1,000,000 through long term borrowing at 8 % interest per annum. (c) Rs.500,000 through ordinary shares and Rs1, 500,000 through long term borrowings at 9% interest per annum. (d) Rs.1,000,000 through ordinary shares and Rs.1,000,000 through preference shares with 5 % dividend. The company's expected earnings before Interest and Taxes (EBIT) will be Rs.800,000.Assuming a corporate tax rate of 50%. Required: (a) Suggest which plan you would recommend the company to adopt? (10 marks) (b)Discuss the agency costs that arise when firms employ substantial amounts of debt. Support your answer with empirical evidences. (10 marks) (c) Write a report for the CFO both outlining the theoretical arguments and explaining the real- world influences on the gearing levels of firms. Support your answer with empirical evidences. (20marks) (d)The working capital needs of a corporate are determined and influenced by various factors. A wide variety of considerations may affect the quantum of working capital required and these considerations may vary from time to time. Explain briefly the Factors determining Working Capital Requirements of a firm (10 marks) The capital structure of Richard Company Ltd consists of an ordinary share capital of Rs. 2,500,000 (face value Rs 100 per share). The company is in the business of Aluminum production. To meet the expenditure of an expansion Programme, the company wishes to raise Rs. 2,000,000. Within the board of directors there is a discussion about the optimal financing choice. Mr. Bale, the CFO, prefers debt financing since this increases the firm's profit per share, and, thus, the value of the shares. He took up the matter with the consultants of the company. They explained to Mr. Bale that if the objective of the firm is the maximization of shareholder wealth, then the debt to equity ratio does not matter. However, their comment holds in a world of no taxes. They argued that in a world with tax, it is best to 'gear-up' the company as high as possible. Now the CFO may not know much about theories of financing decisions but he knows that there are limits to which the debt level is desirable. Richard Company Ltd is having the following four alternatives to raise the funds: (a) Entirely through ordinary shares. (b) Rs.1,000,000 through ordinary shares and Rs.1,000,000 through long term borrowing at 8 % interest per annum. (c) Rs.500,000 through ordinary shares and Rs1, 500,000 through long term borrowings at 9% interest per annum. (d) Rs.1,000,000 through ordinary shares and Rs.1,000,000 through preference shares with 5 % dividend. The company's expected earnings before Interest and Taxes (EBIT) will be Rs.800,000.Assuming a corporate tax rate of 50%. Required: (a) Suggest which plan you would recommend the company to adopt? (10 marks) (b)Discuss the agency costs that arise when firms employ substantial amounts of debt. Support your answer with empirical evidences. (10 marks) (c) Write a report for the CFO both outlining the theoretical arguments and explaining the real- world influences on the gearing levels of firms. Support your answer with empirical evidences. (20marks) (d)The working capital needs of a corporate are determined and influenced by various factors. A wide variety of considerations may affect the quantum of working capital required and these considerations may vary from time to time. Explain briefly the Factors determining Working Capital Requirements of a firm (10 marks)