Question
SBS company is planning an asset to purchase a machine that cost 1,500,000.00. The company is considering the financing of the purchase. The choice that
SBS company is planning an asset to purchase a machine that cost 1,500,000.00. The company is considering the financing of the purchase. The choice that is open either an all-equity financing or a mixture of debt and equity. Currently, deposits in commercial banks provide a risk-free rate of return at 4%. Stock market analyst is of the opinion that the market is expected to provide a return of 20%. Companies in the same industry with no financing through debt has a beta of 0.7. The average share price of companies in the industry is RM 3 per share. The corporate tax rate is 30%. The bond market indicates that issuing bonds at RM 250,000 will cost the company 10% coupon rate. Amount of bonds at RM 500,000 will be charged with a 10.5% coupon rate. The company is analysing the situation with 2 alternative of bonds issues for amount of RM 250,000 and RM 500,000. Another alternative is to use financing with 100% equity. The company expects the earnings before interest and tax (EBIT) in the following scenarios. EBIT Probability 300,000.00 0.333 325,000.00 0.333 350,000.00 0.333 c. Economic Value-Added for each alternative. d. Recommendation on the financing alternatives
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