Alexa company is planning an expansion of its business operations which will increase profit before interest and tax by 20%.The company is considering whether to use equity or debt finance to raise the 2 million dollar needed by the business expansion. If equity finance is used a 1 for 5 rights issue will be offered to existing shareholders at a 20% discount to the current ex dividend share price of $5 per share. The nominal value of the ordinary shares is $1 per share.

 If debt finance is used, Alexa company will issue 20,000 8% loan notes with a nominal value of $100 per loan note.

 Financial statement information prior to raising new finance:

 

                                                                 $000

Profit before interest and tax           1597

 Finance cost(interest)                        (315)

 Taxation                                                (282)

 Profit after tax                                     1000

                                                                $000

Equity

 Ordinary shares                                  2500

 Retained earnings                             5400

 Long term liabilities:

 7% loan notes                                     4500

 Total equity and long

 term liabilities                                    12448

The current price/earning ratio of Alexa company is 12.5 times. Corporation tax is payable at a rate of 22%.

 Companies undertaking the same business as Alexa company have an average debt/equity ratio of 60.5% and an average interest cover of 9 times.

Calculate the theoretical ex rights price per share .

 Calculate the revised earnings per share after the business expansion.

 Assuming debt finance is used calculate the revised earning per share after the business expansion.

 Calculate the revised share prices under both financing methods after the business expansion.

 Use calculations to evaluate whether equity finance or debt finance should be used for the planned business expansion.

 Discuss two islamic finance sources which Alexa company could consider as alternative to a rights issue or a loan note issue.