Part A
Paris Co. Ltd has Equity Share Capital of Rs 500,000. To meet the expenditure of an expansion programme, the company wishes to raise Rs 300,000 and is having the given four alternatives to raise the funds:
Plan A: To have full money from equity shares.
Plan B: To have Rs 100,000 from equity and Rs 200,000 from borrowing from the Financial Institution @ 10% p.a.
Plan C: Full money from borrowing @ 10% p.a.
Plan D: Rs 100,000 in equity and Rs 200,000 from preference shares at 8% p.a.
The company's earnings before interest and tax is Rs 150,000 and the corporate tax is 50%.
Required:
As a financial controller, suggest which plan you recommend the company to adopt?
Part B
"In a world of no-tax, a firm's cost of capital is independent of its capital structure". Explain the above statement and provide appropriate illustrations.