A company, ‘SK Energy Ltd.’ is providing solar energy solutions in some states of the country. Now it wants to expand its operations in some other states also. It needs ₹ 30,00,000 for its expansion. The Chief Financial Officer suggested two options for this.
Option I : To raise the entire funds through issue of shares of ₹ 10 each.
Option II : To raise ₹ 10,00,000 through issue of shares of ₹ 10 each and ₹ 20,00,000 by raising debt @ 10% p.a.
The return on investment of the firm is 12% and tax rate is 30%.
(i) Which of the two options will maximise shareholders’ wealth ? Give reason in support of your answer.
(ii) Will the earning per share improve if return on investment of the company is 8% ? Give reason in support of your answer. Show your working clearly.