Question: Sunami Bhd. is considering expanding its business by adding new stores. However, Gangnam lacks adequate financing to continue the project. RM10 million is needed for
Sunami Bhd. is considering expanding its business by adding new stores. However, Gangnam lacks adequate financing to continue the project. RM10 million is needed for this purposes.
The expansion can be financed by issuing either ordinary shares or bonds. The new ordinary shares is selling at RM80 per share where as the bonds is issued at 12% coupon rate. The company’s corporate tax is 30%. The financial statement of Sunami Bhd. is as follows:
Sunami Bhd.
Balance Sheet as at 31 December 2018 (RM)
Current Assets 4,000,000
Fixed Assets 16,000,000
Total Assets 20,000,000
Current Liabilities 3,000,000
Bonds :
(17%, RM1000 par value) 8,000,000
(8.5%, RM1000 par value) 2,000,000
Preference Shares:
(RM100 par value) 1,000,000
Ordinary shares
(RM4 par value) 4,800,000
Retained Earnings 5,300,000
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Total Liabilities and Equities 14,000,000
If the EBIT is expected to be at RM6,000,000, which financing plan should be selected?
(25 marks)
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