Texts: Vijay & Co. requires Rs. 50 lakh for the erection of a new plant. The following three financial options are to be considered:
1. The company may issue 50,000 equity shares at a face value of Rs. 100 per share.
2. The company may issue 25,000 equity shares at Rs. 100 per share and 25,000 debentures of Rs. 100 each, paying an 8% interest.
3. The company may issue 25,000 equity shares at Rs. 100 per share and 25,000 preference shares at Rs. 100 per share, paying an 8% interest.
If the company's earnings before interest and taxes (EBIT) are Rs. 100,000, Rs. 200,000, Rs. 400,000, Rs. 600,000, and Rs. 1,000,000, what are the earnings per share (EPS) under each of the three financial options?
Discuss the alternative that you would recommend and why. Determine the indifference point. Assume the corporate tax rate to be 40%.