Simplex Co. Ltd. is considering an expansion programme which is expected to cost ₹10,00,000. The company can finance either through debt or equity. Its current financing plan is given as under: Particulars ₹ Equity capit

Simplex Co. Ltd. is considering an expansion programme which is expected to cost ₹10,00,000. The company can finance either through debt or equity. Its current financing plan is given as under: Particulars ₹ Equity capital (50,000 shares @ ₹10 each) 5,00,000 Reserves and surplus 2,00,000 Debt (10%) 3,00,000 Total 10,00,000 The latest income statement reveals the following information : Particulars ₹ Sales 64,00,000 Less : total costs 59,00,000 EBIT 5,00,000 Less : interest 30,000 EBT 4,70,000 Less : income-tax @ 50% 2,35,000 EAT 2,35,000 The expansion programme is expected to generate additional sales of ₹16,00,000 with a return of 15% on sales before interest and taxes. If the expansion is financed through debt, the rate of new debt will be 12% and the price-earnings ratio will be 4 times. If the expansion programme is financed through equity shares, i.e., the new shares can be sold at a price of ₹40 and the price-earnings ratio will be 5 times. Which form of financing should the company choose, if the objective of financial management in the company is maximisation of shareholders' wealth ?