Posted by Anonymous on .
The management of One-M Berhad is considering an expansion project for their current business. RM125,000 is needed for the expansion and two options has been proposed. Under Option I, the project will be financed by issuing new common stocks that can be sold for RM5 per share. Option II involves the use of financial leverage. A 10-year bond can be issued with 8% coupon rates. The company corporate income tax is 30% and the existing preferred stock pay dividends of RM4 per share. The existing capital structures for One-M Berhad are as follows:
(9% RM1,000 par value) 20,000
(RM25 par value) 15,000
(RM2 par value) 25,000
a) Calculate the indifference point of EBIT-EPS for the two financial proposals.
b) If EBIT is expected to be RM 20,000, which financial proposal should you select? Why? (show your calculation)