Gangnam Bhd. is considering expanding its business by adding new stores. However, Gangnam lacks adequate financing to continue the project. RM10 million is needed for this purposes. The expansion can be financed by issuing either ordinary shares or bonds. The new ordinary shares is selling at RM80 per share where as the bonds is issued at 12% coupon rate. The companys corporate tax is 30%. The financial statement of Gangnam Bhd. is as follows:

Gangnam Bhd.

Balance Sheet as at 31 December 2018 (RM)

Current Assets 6,000,000

Fixed Assets 8,000,000

Total Assets 14,000,000

Current Liabilities 2,500,000

Bonds :

(17%, RM1000 par value) 2,000,000

(8.5%, RM1000 par value) 3,000,000

Preference Shares:

(RM100 par value) 600,000

Ordinary shares

(RM4 par value) 600,000

Retained Earnings 5,300,000

Total Liabilities and Equities 14,000,000

If the EBIT is expected to be at RM7,000,000, which financing plan should be selected?

(25 marks)