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Business, 27.08.2019 20:30 bellamvento

Best of luck ltd., a profit-making company, has a paid-up capital of inr. 100 lakhs consisting of 10 lakhs ordinary shares of inr.10 each. currently, it is earning an annual pre-tax profit of inr. 60 lakhs. the company’s shares are listed and are quoted in the range of inr.50 to 80. the management wants to diversify production and has approved a project which will cost inr. 50 lakhs and which is expected to yield a pre-tax income of inr. 40 lakhs per annum. to raise this additional capital, the following options are under consideration of the management: (a) to issue equity share capital for the entire additional amount. it is expected that the new shares (face value of inr. 10) can be sold at a premium of inr. 15. (b) to issue 16% non-convertible debentures of inr. 100 each for the entire amount. (c) to issue equity capital for inr. 25 lakhs (face value of inr. 10) and 16% non-convertible debentures for the balance amount. in this case, the company can issue shares at a premium of inr. 40 each. you are required to advise the management as to how the additional capital can be raised, keeping in mind that the management wants to maximize the earnings per share to maintain its goodwill. the company is paying income tax at 50%.

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