B Ltd. requires Rs.12 lakh to finance its activities. Its earnings before interest and tax amount to Rs.2 lakh. The Finance Manager has forwarded three proposals:
Proposal I II III
Equity Capital 10,00,000 6,00,000 2,00,000
Debt 2,00,000 6,00,000 10,00,000
Interest slab applicable to loan is as under:
Loan up to Rs.2,50,000 10% p.a.
Loan from Rs.2,50,001 to Rs.6,25,000 14% p.a.
Loan from Rs.6,25,001 to Rs.10,00,000 16% p.a.
Tax rate 50%
The market price of a share of the company is Rs.40 which is expected to come down to Rs.25 a share, if the market borrowings exceeds Rs.7,50,000.
Which proposal is most profitable proposal from shareholders point view?
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