With the current capacity of its manufacturing plants, it is very difficult to produce a high quantity of the respirators so Xixian Limited is now considering to buy a bigger respirator producing plant that would cost them $2 million. This new investment is expected to generate a permanent increase in the earnings before interest and taxes of $400,000 per annum. The current earnings before interest and taxes is $0.8million. Xixian Limited's current capital structure consists of contracted debt and equity. The company has 0.1 million preference shares which are traded in the market for $16 each and pay a fixed annual dividend of 8%. Xixian Limited's contracted debt comprises of $1,500,000 of issued bonds that pays 14% per annum. The firm currently has 0.45 million ordinary shares have been issued and are trading at $20 per share. The tax regulation mandates a 25.00% corporate tax rate for Xixian Limited.

questions

To fund the acquisition of the new 'bigger respirator producing plant' entirely, Xixian Limited can issue new ordinary shares (New Equity Plan) at the current market price.What is the impact on EPS if new shares are issued to fund the expansion?

To fund the acquisition of the new 'bigger respirator producing plant' entirely, Xixian Limited can raise new debt at 17.00% interest rate (New Debt Plan). What is the impact on EPS of using debt rather than a new equity issue?

Calculate the EPS indifference point of New Equity plan and New Debt Plan

Comment on the level of Financial Risk of choosing the New Debt Capital structure over the New Equity Capital structure.