Reference no: EM132559314
Question - The management of Cholamandalam Chemicals Limited is considering proposals for expansion of plant capacity that would enable it to produce a range of new chemical products. The expansion plan is estimated to cost Rs. 10, 00,000. After several rounds of discussions with the company's investment bankers, the following three alternatives emerged.
1. Issue 10,000, 10 percent cumulative, non participating preference shares of Rs 100 at par.
2. Issue 5,000 , 10 per cent cumulative, participating preference shares of Rs 100 at Rs 200
3. Issue 40,000 equity shares of Rs 10 at Rs 25.
The company estimates that the additional investment would give a return of 25 percent per year after payment of all expenses including income tax. Net profit for the latest year stands at Rs 140000/- Currently, the shareholders' equity of company consists of the following:
a) Authorized capital of 10,000.
b) 5000 shares - 10 percent cumulative, non - participating preference shares of Rs. 100
c) 10 per cent cumulative, participating preference shares of Rs 100.
d) 100,000 equity shares of Rs 10.
e) Issued capital of 60,000 equity shares of Rs 10 fully paid.
Apart from the above, the company has retained earnings of Rs 2,75,000. The company plans to distribute the entire net profit in the coming year.
Question - From the stand point of the company's existing shareholders, which is the best alternative? Should the company proceed with the expansion? Explain.