Question

. Your board is thinking of putting up a wing worth Php 20,000,000. It is faced with ,000 per nstruction and operation of the two options: financing it with a 5 year debt with an effective annual interest rate of 7% or issuance of 20,000 common shares at a par value of Php1 share. Currently the hospital has a total capitalization of Php 200,000,000. What will your recommendation to the board be?The co added wing is expected to give the hospital an additional annual net income of Php50,000,000 to its existing annual net income of Php70,000,000. What would be your stand on this?

Answer 1

4 To compare the debt vs equity financing option we will calculate EPS in both option Equity financing option 70000000 Debt financing option 8 Revised net income 9 Interest 10 Earnings for stock holders 11 No of outstanding shares 12 Earnings per share 13 14 The EPS is higher in debt financing option so the company should opt for debt financing as it will maximise sha 15 70000000 20000000*796 -B8-B9 -C8-C9 200000000/1000+ 20000) -B10/B11 200000000/1000 -C10/c11