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Question

A company's earning before interest amd tax is Rs. 7 lac. It pays 10% interest on its debt. Total investment of company is Rs. 50 lac. Advise company whenever it should included debt or equity to raise its capital.


  1. Debt

  2. Equity

  3. None of the above 

  4. All of the above


Solution

The correct option is A

Debt


Company should prefer debt to raise fund as debt is gainful for equity shareholders till ROI > Rate of Intrest

In the above case ROI = racEBIT Total Income×100=750×100=14%

14> 10, so debt is more suitable.

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