Mutiara Auto Parts is considering expanding its Penang factory at Bayan Lepas Industrial area. The expansion would be financed by the sale of common stock or a bond issue. The financial manager needs to evaluate how the two alternative financing plans will affect the earnings potential of the firm. The total financing required is $10 million. The firm currently has $10 million of 10% coupon bonds and 1,000,000 common stocks outstanding. The firm has a 40% tax rate. The firm can arrange financing of the $10 million through: Plan 1: 12% coupon bond issue Plan 2: Sale of 500,000 new shares of common stock a. The new interest cost under Plan 1 is? b. The existing interest cost under Plan 1 is? c. The total interest cost under Plan 1 is? d. The existing number of common shares outstanding is? e. The existing interest cost under Plan 2 is?
note: can you help me answer the question for a, b and c?
Mutiara Auto Parts is considering expanding its Penang factory at Bayan Lepas Industrial area. The expansion would be financed by the sale of common stock or a bond issue. The financial manager needs to evaluate how the two alternative financing plans will affect the earnings potential of the firm.
The total financing required is $10 million. The firm currently has $10 million of 10% coupon bonds and 1,000,000 common stocks outstanding. The firm has a 40% tax rate.
The firm can arrange financing of the $10 million through:
Plan 1: 12% coupon bond issue
Plan 2: Sale of 500,000 new shares of common stock
a. The new interest cost under Plan 1 is?
b. The existing interest cost under Plan 1 is?
c. The total interest cost under Plan 1 is?
d. The existing number of common shares outstanding is?
e. The existing interest cost under Plan 2 is?
f. The number of additional shares issued under Plan 2 is?
g. The total number of common shares outstanding under Plan 2 is?
h. The degree of final leverage (DFL) for Plan 1 at $4,600,000 of EBIT is?
i. The degree of final leverage (DFL) for Plan 2 at $4,600,000 of EBIT is?
j. The financial break-even point under Plan 1 is?
k. The financial break-even point under Plan 2 is?
l. The EPS under Plan 1 is (per share)
m. The EPS under Plan 2 is (per share)
n. Based on the analysis in part (a) to part (m) above which plan should Mutiara Auto Parts choose and why? Plan (1/2?) because it is (more/equally/less?) risky and gives the (same/higher/lower?) EPS.
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