QUESTION 1 (a) XYZ Company presently has K30 million in debt outstanding bearing a 12% interest rate. The company wishes to finance a K40 million expansion programme and is considering two alternatives: (i) Additional debt at 14% (ii) The sale of common stock at K160 per share The company presently has 800,000 shares of common stock outstanding and is in the 40% tax bracket. 1. If EBIT are presently K15 million, what would be the EPS for the two alternatives assuming no immediate increase in profitability? (10 marks) 2. Which financing method would you recommend? Explain your answer. (5 marks) (b) A firm is considering two alternative plans to finance a proposed K7 million investment. Plan A: Issue debt (9 percent interest rate). Plan B: Issue common stock (at K20 per share, 1 million shares currently outstanding). The company's income tax rate is 40 percent. If EBIT are 30% of the investment, calculate: (i) the EPS and break-even point for each plan, (ii)the degrees of operating, financial and total leverage, and, (iii) state which financing method the company should adopt and why. (15 marks) (Total: 30 marks)