Donald Ltd’s equity is as follows: 

Donald Ltd plans to expand its operations by acquiring substantial landholdings in Scotland. The expansion will cost $4 million. Expected profit before tax and interest after the expansion is $$1 000 000. The tax rate is 30%. The managers of Donald Ltd are considering two financing alternatives:

1. Borrow $4 million at 10% interest.

2. Issue 1 million $4 shares.

Required

Which funding alternative yields the higher return on equity? What other factors should be considered?