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Pentel Ltd, a computer assembly company, intends to expand its operations. This will require an expansion of its assets by 50%. The annual incremental sales...

      

Pentel Ltd, a computer assembly company, intends to expand its operations. This will require an expansion of its assets by 50%. The annual incremental sales to be generated by this expansion are estimated to be sh. 18 million with annual incremental earnings before interest and taxes (EBIT) of 25% on incremental sales. All the financing for this expansion will come from external sources as profit retentions are already committed elsewhere.
A financial analyst hired by the company has submitted the following proposals of financing the expansion for consideration:
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The tax rate is expected to remain constant at 30%.
Required:
a) The number of additional ordinary shares to be issued under financial plans B and C.
b) The earnings per share (EPS) indifference points between:
i) Plan A and plan B
ii) Plan A and plan C
iii) Plan B and plan C
c) Assume that the price/earnings (P/E) ratio will be 8 if plan C is adopted but will drop to 6 if either plan A or plan B is used to finance the expansion.
Determine the market price per share under each financing plan and advise Pentel Ltd, on the best means of financing the expansion.

  

Answers


Kavungya
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Kavungya answered the question on April 13, 2022 at 12:43


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