Simulation 5 : 5.1Carlisle Cha Corporation is considering an expansion of its chemical plant and requires an additional RM5 Million capital next year. The top management has two alternatives to obtain financing and they are: Alternative 1 Issue 50% bond having an interest rate of 6% per annum and the balance will be financed in the form of common stock with a par value of RM10. Alternative 2 Issue 8% preferred stock having a par value of RM100. The company tax rate is 28%. Below is the present Balance Sheet (partial) of Carlisle Cha Corp. Liabilities & Net Worth RM Current Liabilities 500,000 10% Debenture 2,000,000 8% Preferred Stock 3,000,000 Common stock @ par value RM5 10,000,000 15,000,000 As a Finance Director of Carlisle Cha Corp. Decide the best alternative to be adopted by the corporation if it forecasts its earnings before taxes for next year to be RM2 Million and give a reason for your selection. Apart from that, as a director you are required to check the point of difference for earnings before interest taxes and earnings per share of the company. 5.2 La Paloma Corporation presently has RM3 million 8% debt and 400,000 shares of common stock outstanding. The company requires RM5 million for business expansion and is considering two proposals. Corporate tax is 30%. Proposal 1 Issue an additional 6% debt Proposal 2 Issue 50% common stock with a par value of RM5 per share and 50% of 12% preferred stock diividend with a par value of RM100 per share. Compute the point of indifference of La Paloma Corporation for both earnings before interest and taxes (EBIT). Assuming that La Paloma Corporation EBIT is RM2 Million, advise the company which proposal should be chosen. Justify the decison for the La Paloma Corporation. Simulation 5 : Carlisle Cha Corporation is considering an expansion of its chemical plant and 5.1 requires an additional RM5 Million capital next year. The top management has two alternatives to obtain financing and they are: Alternative 1 Issue 50% bond having an interest rate of 6% per annum and the balance will be financed in the form of common stock with a par value of RM10. Alternative 2 Issue 8% preferred stock having a par value of RM100. The company tax rate is 28%. Below is the present Balance Sheet (partial) of Carlisle Cha Corp. Liabilities & Net Worth RM Current Liabilities 500,000 10% Debenture 2,000,000 8% Preferred Stock 3,000,000 Common stock @ par value RM5 10,000,000 15,000,000 As a Finance Director of Carlisle Cha Corp. Decide the best alternative to be adopted by the corporation if it forecasts its earnings before taxes for next year to be RM2 Million and give a reason for your selection. Apart from that, as a director you are required to check the point of difference for earnings before interest taxes and earnings per share of the company. 5.2 La Paloma Corporation presently has RM3 million 8% debt and 400,000 shares of common stock outstanding. The company requires RM5 million for business expansion and is considering two proposals. Corporate tax is 30%. Proposal 1 Issue an additional 6% debt Proposal 2 Issue 50% common stock with a par value of RM5 per share and 50% of 12% preferred stock diividend with a par value of RM100 per share. Compute the point of indifference of La Paloma Corporation for both earnings before interest and taxes (EBIT). Assuming that La Paloma Corporation EBIT is RM2 Million, advise the company which proposal should be chosen. Justify the decison for the La Paloma Corporation.