QUESTION 2 Share Issue Debenture Issue Earnings Before Interest & Tax(EBIT) $1 500000 I500000 Less: Interest Expense@ 12% 48000 Earnings before Tax 1500000 1020000 Less: Tax(@ 30% 450000 306000 Earnings available for Distribution to 1050000 714000 Ord inary shareholders No of Ordinary Shares Issued 300000 200000 Earnings Per Share(EPs S350 $3.57 b) See ATTACHED EBIT-EPS chart (X-1)(1-T)-PD_(X-2)(-T)-PD2 (x-0)(-03)0(×-48000403-0 300000 200000 07X0.7X336000 14X=2.1X-1008000 -0.7X=-1008000 X=$1440000 EPS=$3.36 d) Assuming that the company wishes to maximise EPS, it would prefer to finance the expansion program by an issue of ord inary shares if the eBit are likely to be less than $1 440 000. If EBIT are equal to $1 440 000, the company would be indifferent between the equity and debt financing plans. The company would opt for a debenture issue if eBIt are expected to exceed $1 440 000 Given that EBIT are projected to be $1.5 million, I would recommend that Lynch Lyons Ltd fund the program by issuing debenturesSeptember 2003 QUESTION 2 a) Share Issue Debenture Issue Earnings Before Interest &Tax (EBIT) $1 500 000 $1 500 000 Less: Interest Expense @ 12% 0 480 000 Earnings Before Tax 1 500 000 1 020 000 Less: Tax @ 30% 450 000 306 000 Earnings Available for Distribution to Ordinary Shareholders 1 050 000 714 000  No. of Ordinary Shares Issued 300 000 200 000 Earnings Per Share (EPS) $3.50 $3.57 b) See ATTACHED EBIT-EPS chart. c) ( )( ) ( )( ) ( )( ) ( )( ) EPS = $3.36 X = $1440 000 - 0.7X = -1008 000 1.4X = 2.1X -1008 000 2 0.7X - 336 000 = 3 0.7X 200 000 X - 480 000 1- 0.3 - 0 = 300 000 X - 0 1- 0.3 - 0 N X - I 1- T - PD = N X - I 1- T - PD 2 2 2 1 1 1 d) Assuming that the company wishes to maximise EPS, it would prefer to finance the expansion program by an issue of ordinary shares if the EBIT are likely to be less than $1 440 000. If EBIT are equal to $1 440 000, the company would be indifferent between the equity and debt financing plans. The company would opt for a debenture issue if EBIT are expected to exceed $1 440 000. Given that EBIT are projected to be $1.5 million, I would recommend that Lynch￾Lyons Ltd fund the program by issuing debentures