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need answers for C,D,E AZ Steel Bhd is planning to expand its production. The expansion will cost RM500,000, which can be financed either by bonds
need answers for C,D,E
AZ Steel Bhd is planning to expand its production. The expansion will cost RM500,000, which can be financed either by bonds at an interest rate of 10% or by selling common stock at RM40 per share. The current income statement before expansion is as follows: AZ Steel Bhd Income Statement For the Year Ended December 31,2016 RM RM Sales 3,000,000 Variable costs 1,050,000 Fixed costs 1,000,000 2.050,000 Eamings before interest and taxes (EBIT) 950.000 Interest expense 50,000 Earnings before taxes (EBT) 900,000 Taxes (34%) 306,000 Earnings after tax (EAT) 594,000 Shares 1,000,000 Eamings per share 0.594 After the expansion, sales are expected to increase by RM 1,000,000 Variable costs will remain 35% of sales, and fixed costs will increase to RM 1,800,000. The tax rate is 34% a. Calculate the Degree of Operating Leverage (DOL), Degree of Financial Leverage (DFL) and Degree of Combined Leverage (DCL) before the expansion (5 marks) b. Based on your answers in (0) 1. if sales doubled, by what percent will the EPS increase? (2 marks) ii. if EBIT decreased by 8%, what would the new EPS be? (3 marks) c. Prepare the analytical income statement for the two alternatives financing plans. (6 marks) d. Calculate the DOL, DFL and DCL after the expansion (5 marks) e. Explain which financing plan you favour and the risk involved with each plan. (4 marks) Step by Step Solution
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