1. Company should prefer debt to raise fund as debt is gainful for equity shareholders’ till
ROI > Rate of Interest.
In the above case ROI = EBIT × 100
Total Income = 7 × 100 = 14%
14 > 10 so debt it more suitable.
2. The concept is leverage effect or trading in equity.
3. Yes company’s decision will change if EBIT becomes 3 lac, because with 3 lac ROI will become less than interest.
ROI = EBIT × 100 = 3 × 100 = 6%
Total Income 50
Interest = 10%
6% < 10%
So, now company must prefer equity to raise capital.