a) Milestone Co. analyzing two financial plan for their newly form subsidiary. The plans are described as follows: Plan I Plan II Bonds at 11%, value RM402,500 Common stock: market value RM107,950 Bonds at 11%, value RM280,000 Common stock: market value RM152,400 The market price of the stock is RM12.70 and the corporate tax rate is 34 percent. Required: i. Find the EBIT EPS indifference level associated with the two financing plans. (4 marks) (CLO3:PLO6:C3) ii. Prepare a pro forma income statement if the earnings before interest and taxes (EBIT) is expected to be RM175,000. Which financing plan should be selected and why? (4 marks) (CLO3:PLO6:C3) b) You have been offered to be a finance manager at Allan Supply company which is a food company listed on the stock market. Now the company has no debt and only has equity with the total value of RM12,000,000 and the market price is RM25. The management has decided to issue a RM5,500,000 with a 9 percent interest rate and use this debt to repurchase their shares in the market. As finance manager, you need to determine the impact of these decisions on earning per share of the company. The company predicted that the earnings before interest and taxes (EBIT) are RM2,300,000 if economic conditions are normal. If there is a recession, then the EBIT will be 35 percent lower and if strong expansion the EBIT will be 20 percent higher.

Required:

i. Calculate the earnings per share (EPS) under all economic scenarios assuming that the company goes through with recapitalization. Also calculate the percentage change in EPS when the economy expands. (8 marks) (CLO3:PLO6:C3)

ii. Determine the return on equity (ROE) under each of the three economic scenarios after the recapitalization. (2 marks) (CLO3:PLO6:C3)