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Question
The Board of directors of Medex Pharma Ltd. decided to issue debentures worth ₹ 40 lakhs in order to finance a major Research and Development project. This would increase the Debt Equity ratio from 1:1 to 2:1.However, at the same time it would increase the Earnings per share.
The reason that will justify the above situation is ______.
Options
Unfavourable financial leverage, as the financial risk will be higher.
Unfavourable financial leverage, as return on investment is lower than the cost of debt.
Favourable financial leverage as debt is easily available
Favourable financial leverage, as return on investment is higher than cost of debt
Solution
The Board of directors of Medex Pharma Ltd. decided to issue debentures worth ₹ 40 lakhs in order to finance a major Research and Development project. This would increase the Debt Equity ratio from 1:1 to 2:1.However, at the same time it would increase the Earnings per share.
The reason that will justify the above situation is favourable financial leverage, as return on investment is higher than cost of debt.
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