Question

‘Ratan Ltd.’ and ‘Lara Ltd.’ are two companies with each having a capital employed of Rs. 20,00,000. ‘Ratan Ltd.’ had raised funds by issuing shares whereas ‘Lara Ltd.’s capital has 60% equity and 40% debt (8% debentures). Both have ROI of 10% and tax rate is 40%. State with reason which company will give a better return to shareholders.

Hint:

Debt is a "Double-Edged Sword." It increases returns when ROI is high but can lead to bankruptcy if ROI falls below the interest rate.

Answer 1