You are investigating the expansion of your business and have sought out two avenues for the sourcing of funds for the expansion. The first (Plan A) is an all-ordinary-share capital structure. $1 million would be raised by selling 250,000 shares at $4 each. Plan B would involve the use of financial leverage. $700,000 would be raised issuing bonds with an effective interest rate of 13% (per annum). Under this second plan, the remaining $300,000 would be raised by selling 75,000 shares at $4 price per share. The use of financial leverage is considered to be a permanent part of the firm's capitalisation, so no fixed maturity date is needed for the analysis. A 30% tax rate is appropriate for the analysis.
You are investigating the expansion of your business and have sought out two avenues for the sourcing of funds for the expansion. The first (Plan A) is an all-ordinary-share capital structure. $1 million would be raised by selling 250,000 shares at $4 each. Plan B would involve the use of financial leverage. $700,000 would be raised issuing bonds with an effective interest rate of 13% (per annum). Under this second plan, the remaining $300,000 would be raised by selling 75,000 shares at $4 price per share. The use of financial leverage is considered to be a permanent part of the firm's capitalisation, so no fixed maturity date is needed for the analysis. A 30% tax rate is appropriate for the analysis.
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 22P
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