Kyoto Ltd plans to undertake a new line of production, which requires additional capital of $$1$

million. To finance the expansion, the management has to choose either a debt issue or a new

share issue. Kyoto Ltd has $3$ million ordinary shares issued and paid up at a par value of $$1\mathrm{.}00.$

The new ordinary shares can be sold at $$2\mathrm{.}00$ each and financing by equity will not affect the

company$$s current market price of $$2\mathrm{.}00$ per share. If the expansion is financed with debt, the

interest rate on the new debt will be $8\%$ per annum, and the market price of the shares will

increase to $$2\mathrm{.}10$ per share.

a$)$ Prepare a table showing the total market value of the company, the rate of return on equity,

and earnings per share for both forms of financing if the annual net income before interest and

taxes are $($i$)$ $$0\mathrm{.}5$ million and $($ii$)$ $$1$ million. The company tax rate is $30$ cents in the dollar.

b$)$ Based on the results in part $($a$),$ which financing plan should the company use? Give reasons.