Fox Ten Limited (FTL) is a new company and management are trying to decide on a

Question

Fox Ten Limited (FTL) is a new company and management are trying to decide on a financing structure.They need to raise funds of $15 million and aredeciding between the following options:

The first option is to use 90% equity and 10% debt. It will issue ordinary shares at $3.00 each and borrow the remainder at an interest cost of 9% p.a.

–The second option is funding 40% of the firm with debt and the balance with ordinary shares at an issue price of $3 per share. FTL has been advised that the cost of debt will rise to 12% pa in this case due to the increased financial

risk. The tax rate is 30%.

(a)How many shares will be issued under each option?

Explanation / Answer

solution :

First option 90% equity (15000000x90%)          1,350,000 No of shares to be issued @ 3              450,000 (13500000/3) Second option 60% equity (15000000x60%)              900,000 No of shares to be issued @ 3              300,000 (9000000/3)

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