2 The second option relates to equity financing. The underwriters believe that, if the company were to issue shares to fund the proposed project, they would have to be sold at a discount of 20 per cent. Issue expenses will be 1 per cent of the funding requirement. Estimate the return required by investors when investing in Electrolar plc’s new share issue. (25 marks)

Electrolar AB is planning to set up new operations in northern Sweden. Having established that the investment has a positive net present value, it now has to consider its financing decision. The underwriters to the company state that the total funding required amounts to SKr0.5 billion and that this can be raised through a debt issue or an equity issue.