Healthy Feedmill established 2 (two) subsidiaries that produce poultry feed products: (1) PT. Royal and (2) PT Nadrem. This is part of the companys grand strategy to extend the range and reach of value-added products to its customers. Production from the first subsidiary PT Royal in congo Production from the second subsidiary PT Nadrem in Maacau.

PT Royal and PT Nadrem have comparable operational cost structures at the moment. Both companies have fixed operating costs of 8.000.000.000 and maintained variable operating cost of 12.500.000/ton and sale price of 20.000.000/ton for the poultry feed products. The company operates with a 25% tax bracket. During the latest annual meeting held in 2020, the CEO of Healthy Feedmill released an analysis of each subsidiary. Based on the meeting report, there are significant differences on how the two subsidiaries operate and manage their financial structures. The report contains the following information:

Case:

PT Nadrem successfully record sales of 1.400 tons. PT Nadrem maintains has 40% debt ratio level with 35.000.000.000 10-year bonds with 10% (annual) coupon rate of interest. The companys equity consists of: (a) 8.000 shares of IDR 300 (annual dividend per share) preferred stock outstanding and (b) 450.000 shares of common stocks outstanding.

Required:

The firms are considering 2 alternatives capital structures: 0% debt and the current 40% debt ratio of each company. Regarding the 0% debt capital structure:

PT Nadrem For 0% debt capital structure, BC has 700.000 shares of common stock outstanding and no preferred stock.

Analyse the risk of each capital structure alternative by performing the EBIT-EPS analysis (you are free to choose any EBIT level). Decide which capital structure option i.e., with current debt level of 40% or 0% debt (no debt) would be more efficient for the company? Explain your analysis by presenting the EBIT simulation.