Finance

posted by .

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:

Bonds: RM
(9% RM1,000 par value) 20,000

Preferred Stock:
(RM25 par value) 15,000

Common Stock:
(RM2 par value) 25,000


Questions:
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)

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. Finance

    Wheel Industries is considering a three year expansion project. The project requires an initial investment of $1.5 million. The project will use straight line depreciation method. The project has no salvage value. It is estimated that …
  2. finance

    One yaer fom now, how much value creation is expected from the expansion?
  3. Finance

    Summer Tyme, Inc., is considering a new 4-year expansion project that requires an initial fixed asset investment of $1.782 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time …
  4. Economics

    Moore Company is considering an expansion project. It would require the acquisition of an asset that would be depreciated straight line to zero over the 4 years of the project. It expects to be able to sell the asset for $50,000 at …
  5. finance

    Wheel Industries is considering a three-year expansion project. The project requires an initial investment of $1.5 million. The project will use straight-line depreciation method. The project has no salvage value. It is estimated that …
  6. Business

    Assume that WilyMarketer is running an email campaign to acquire new customers. It is considering two options: Option A would use a high quality rental list of 100,000 email addresses. Direct costs under this option would be the rental …
  7. Finance

    Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time …
  8. Math

    Fijisawa Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $1,980,000, and the project would generate incremental free …
  9. Accounting

    ABC Corp Ltd has 10 million shares and $600,000 of debt (issues bonds @ 7% p.a.). EBIT is projected to be $3 million. The company tax rate is 20%.Preference shares pay an annual dividend of $100,000. Management is considering two options …
  10. accounting

    ABC Corp Ltd has 10 million shares and $600,000 of debt (issues bonds @ 7% p.a.). EBIT is projected to be $3 million. The company tax rate is 20%.Preference shares pay an annual dividend of $100,000. Management is considering two options …

More Similar Questions