The present capital structure of a company is as follows

The management would like to adopt the alternative which will maximise the wealth of the shareholders. Keeping this objective in mind decide the best alternative. (10 Marks)

Rs. Lakhs Equity share capital (face value per share Rs.10) 10000 8% Preference Share Capital 5000 9% Non convertible Debentures 5000 11% Term loans 10000 Its present return on capital employed is 25% The present market price per share is Rs. 100 The rate of corporate tax is 25% It has a proposal under consideration which require additional financing to the extent of 50% of its existing capital employed. An investment in this proposal is expected to increase the return on capital employed to 35% of the total capital employed. The following alternative modes of investment are under consideration. Rs. Lakhs Equity share capital (face value per share Rs.10) 10000 8% Preference Share Capital 5000 9% Non convertible Debentures 5000 11% Term loans 10000 Its present return on capital employed is 25% The present market price per share is Rs. 100 The rate of corporate tax is 25% It has a proposal under consideration which require additional financing to the extent of 50% of its existing capital employed. An investment in this proposal is expected to increase the return on capital employed to 35% of the total capital employed. The following alternative modes of investment are under consideration