M Ltd. requires Rs.25,00,000 for a new plant. This plant is expected to yield EBIT of Rs.5,00,000. The company considers the objectives of maximizing EPS. It has 3 options to finance the project - by raising debt of Rs.2,50,000 or Rs.10,00,000 or Rs.15,00,000 and the balance, in each case, by issuing equity shares. Company’s shares 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 and 15% up to Rs.10,00,000 and at 20% over Rs.10,00,000. The tax rate is 50%. Which form of financing should company choose?
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