Company A is planning a $4,000,000 expansion this year. The expansion can be financed by issuing either common shares of bonds. The new common share can be sold for $5 per share. The bonds can be issued with a 12% coupon rates. The firm’s existing preference share pay dividends of $2 per share. The company’s corporate income tax is 30%. The financial statement is as follow:- Current Assets $ 2,000,000 Fixed Assets $ 8,000,000 $ 10,000,000 Current Liabilities $ 1,500,000 Bonds: (8.5%, $1,000 par value) $ 4,000,000 (9%, $1,000 par Value) $ 1,000,000 Preference Shares ($ 100 par value) $ 500,000 Ordinary Shares ($ 2 par value) $ 2,400,000 Retained Earnings $ 600,000 $ 10,000,000 Calculate the indifference level of EBIT between the two Plans. If EBIT is Expected to be RM1,500,000 which plan will result in a high EPS?
Company A is planning a $4,000,000 expansion this year. The expansion can be financed by issuing either common shares of bonds. The new common share can be sold for $5 per share. The bonds can be issued with a 12% coupon rates. The firm’s existing
Current Assets $ 2,000,000
Fixed Assets $ 8,000,000
$ 10,000,000
Current Liabilities $ 1,500,000
Bonds:
(8.5%, $1,000 par value) $ 4,000,000
(9%, $1,000 par Value) $ 1,000,000
Preference Shares
($ 100 par value) $ 500,000
Ordinary Shares
($ 2 par value) $ 2,400,000
$ 10,000,000
- Calculate the indifference level of EBIT between the two Plans.
- If EBIT is Expected to be RM1,500,000 which plan will result in a high EPS?
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