The sales of the company are growing and to support this, the company proposes to obtain an additional bank borrowing as Rs. 25 lakhs at 15% p.a. The increase in EBIT is expected to be 20%. Calculate the change in interest coverage ratio after additional borrowings and after your comments. The present EBIT is Rs. 12 lakhs (11) Interest on present borrowing Term Loans-12% of Rs. 40 lakhs Public Deposit- 12% of Rs. 15 Bank Loan- 15% of Rs. 35 Total Rs. = 4.80 lakhs = 1.80 lakhs = 5.25 lakhs 11.85 lakhs EBIT (iii) Present Interest Coverage Ratio Interest 12.00 11.85 = 1.01 Times. t53 120 (iv) Revised EBIT= 12 x 100 = Rs. 14.40 lakhs (v) Revised amount of interest=Rs. 11.85 lakhs x 15% of 25 lakhs = Rs. 11.85 + Rs. 3.75 lakhs = Rs. 15.6 lakhs EBIT (vi) Revised Interest Coverage Ratio Interest 14.40 15.60 = 0.92 Illustration 5: Mangalore Chemicals Ltd. requires Rs. 25 lakhs for a new plant. This plant is expected to yield earnings before interest and taxes of Rs. 5 lakhs. While deciding about the financial plan, the company considers the objective of maximising earnings per share. It has three alternatives to finance the project by raising debt of Rs. 2,50,000 or Rs. 10,00,000 or Rs. 1,50,000 and the balance in each case, by issuing equity shares. The company's share is currently selling at Rs. 150 but it is expected to decline to Rs. 125 in case the funds are borrowed in excess of Rs. 10,00,000. The funds can be borrowed at the rate of 10% up to Rs. 2,50.000 at 15% over Rs. 2,50,000 and up to Rs. 1,00,000 and at 18% over Rs. 10,00,000. The tax rate applicable to the company is 30%. Which form of financing should the company chose