QUESTION 3 (11 marks)

The management of Honey Corp is planning RM120,000 expansions this year. The expansion can be financed by issuing either common stocks or bonds. The new common stocks can be sold for RM80 per share. The bonds can be issued with a 9% coupon rate. The companys existing preferred stocks pay dividends of RM1.50 per share. The company corporate income tax is 25%. The balance sheet of Honey Corp is as follows:

Honey Corp.

Balance Sheet as at 31December 2016

Current Assets RM20,000

Fixed Assets 18,000

Total Assets 38,000

Current Liabilities 1,500

Bonds:

(8%, RM1,000 par value) 10,000

(10%, RM1,000 par value) 10,000

Preferred Stocks:

(RM100 par value) 15,000

Common Stocks:

(RM2 par value) 700

Retained Earnings 800

Total Liabilities and Equities 38,000

1. Calculate the indifference point of EBITEPS between the two financing plans.
2. Prepare an EBIT-EPS analysis chart for this situation.