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QUESTION 2 (25 MARKS) The MAX Corporation is planning RM4,000,000 expansion this year. The expansion can be financed by issuing either common stock or bonds.
QUESTION 2 (25 MARKS) The MAX Corporation is planning RM4,000,000 expansion this year. The expansion can be financed by issuing either common stock or bonds. The new common stock can be sold for RM60 per share. The bonds can be issued with a 12 percent coupon rate. The firm's existing shares of preferred stock pay dividends of RM2.00 per share. The company's corporate income tax rate is 46 percent. The company's financial position prior to expansion is as follows: MAX Corporation Current Assets RM2,000,000 Fixed Assets RM8,000,000 TOTAL ASSETS RM10,000,000 Current Liabilities RM1,500,000 Bonds: (8%, $1,000 par value) RM1,000,000 10%, $1,000 par value) RM4,000,000 Preferred Stock: (RM100 par value) RM500,000 Common Stock: KRM2 par value) RM700,000 Retained Earnings RM2,300,000 TOTAL LIABILITIES AND EQUITY RM10,000,000 a. Describe the sources of business risk (8 marks) b. Calculate the indifference level of Earning Before Interest and Tax (EBIT) between the two plans. (10 marks) c.If EBIT is expected to be RM3 million, which plan will result in higher Eraning Per Shaere (EPS)? (7 marks)
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