QUESTION 5: The Board of Directors of Sycal Berhad decided to expand its present production capacity with an investment of $20 million. This decision is based on their forecast of a demand for its products. The Board has assigned the task of choosing the method of financing the $20 million expansion to the Finance Committee The finance committee is considering the following financing alternatives Option 1: Issuance of $20 million bonds carrying a coupon rate of 12 % Option 2: Issuance of new common stocks worth $20 million at an issue price of S1.60 per share Option 3: By issuing $10 million bonds with a coupon rate of 1 190 and $10 million new shares at an issue price of S1.60 per share The Balance Sheet of Sycal Berhad as at June 30, 2016 is as follows Share capital of $1 each Retained profits Long-term loans @ 10 % Current liabilities $ 000 16,000Fixed assets 7,000Inventory 10,000Debtors 7,000 Bank S 000 26,000 6,000 6,000 2,000 Sycal Berhad's present earnings before interest and tax (EBIT) are $7.2 million. The increase in EBIT as the result of the expansion is estimated to be S3.8 million. . The present quoted price of Sycal Berhad shares is S1.94 and its price-earnings (P/E) ratio is 10 Depending on the financing alternative chosen, the P/E ratio will change as follows Expected New P/E Ratio Option (1) Option (2) Option (3) 8.0 11.0 10.0 Assume that the tax rate applicable to the company is 45 % a) For each of the 3 financing alternatives calculate the earnings per share and the expected (17 marks) market price if the expansion is carried out b) Which financing alternative should be chosen? Explain why that despite a higher EPS the (3 marks) all-debt financing is not preferred