Success Resources has prepared a sales forecast and the probability of achieving each sales level are as follows

	Forecast Sales Level
Jualan/Sales (RM)	200,000	300,000	400,000
Kebarangkalian/Probability	0.20	0.60	0.20

Success Resources also has fixed operating costs of RM75,000 and variable operating costs of which equal to 70% of the respective sales level. The firm pays RM 12,000 as interest each year. The present tax rate is 40%.

i) What would be the earnings before interest and taxes (EBIT) for each level of sales?

(1 markah/mark)

ii) Calculate the following questions with the assumption that there are 10,000 shares of common stock outstanding for each level of sales.

a. earnings per share

b. the expected earnings per share

c. the standard deviation of the earnings per share

d. the coefficient of variation of earnings per share

(4 markah/marks)

iii) Success Resources could reduce its leverage to zero so that it has no interest to pay. To achieve this, the number of shares outstanding must be increased to 15,000 units of shares. Repeat part (ii) above under this assumption.

(4 markah/marks)

iv) Based on your findings in parts (ii) and (iii) above, comment on the effect of the reduction of debt to zero on the firms financial risk.

(1 markah/mark)