the Drew Furniture Company is considering the introduction of a new product line. Plants and inventory expansion equal to 50% of the present assets levels will be necessary to handle the anticipated volume of the new product line. New capital will have to be obtained to finance the assets expansion. Two proposals have been developed to provide the additional capital. a) Raise the Rs 1, 00,000 by issuing 10 year 12% bonds. This will change the capital structure from one with about 20% debt to one with almost 50% debt. The investment banking house estimates the price / earnings ratio, now 12 to 1, will be reduced to 10 to 1 if this method of financing is chosen. b) Raise the Rs 1, 00,000 by issuing new common stock. The investment banker believes that the stock can be issued to yield Rs 33.33. The price /earnings ratio would remains at 12 to 1, if the stock were issued. The present market price is Rs 36. The company's most recent financial statement is as follows: Balance sheet as on 31st December, 2001 Liabilities Amount Assets Amount Common stock 1,00,000 Plant and equipment 1,35,000 5% debt 40,000 Current assets 65,000 Retained earning 60,000 2,00,000 2,00,000 Income statement for the year ended 31st December 2001 Sales 6,00,000 Less : operating cost 5,38,000 Operating income 62,000 Less: interest charges (2,000) Net income before taxes 60,000 Less : income tax (30,000) Net income 30,000 I. The vice president of finance asks you to calculate the earnings per share and the market value of the stock(assuming price/earnings ratio given are valid estimates) for the two proposals assuming total sales(including the new product line) of: (1) Rs 4,00,000 (2) Rs 6,00,000 (3) Rs 8,00,000 Costs exclusive of interest and taxes are about 90% of sales II. Which proposal would you recommended? Your answer should indicate (1) The criteria used to judge and alternatives. (2) A brief defense of the criteria used; and (3) The proposal chosen in accordance with the criteria III. Would your answer change if a sales level of Rs 12,00,000 could be achieved?