After the investment, which of the following statements is correct?

A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.

The following data currently applies:

• Profit before interest and tax for the current year is $500,000

• Long term debt of $300,000 at a fixed interest rate of 5%

• 250,000 shares in issue with a share price of $8

The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.

The additional debt would carry an interest rate of 3%.

Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.

The rate of corporate income tax is 30%.

After the investment, which of the following statements is correct?
A . Interest cover will fall; P/E ratio will fall.
B . Interest cover will fall; P/E ratio will rise.
C . Interest cover will rise; P/E ratio will rise.
D . Interest cover will rise; P/E ratio will fall.

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Answer: B