B: EXPANSION

The shift to fibre in the telecommunications industry has directly affected Khuluma and many of the technicians working for Khuluma were retrenched. Khulumas management decided to expand their product range to include fibre related products to keep up with the changes in the industry. To support the manufacture of fibre products, Khuluma will need to invest in specialised equipment to the value of R15 million which will be acquired from a supplier in China. Ms Jane Kos, the financial director, is considering the following two options regarding the financing of the equipment.

Equity

Khuluma will raise the funds by issuing ordinary shares at the current share price.

Loan

Khuluma can obtain a loan from UBC bank for R15million. Interest will be charged at prime plus 3%. The loan is repayable in five, equal, annual instalments, comprising interest and capital. UBC requires Khuluma to provide a portion of the companys property, plant and equipment as security for the loan.

1 Draft a memo to Ms. Kos advising her on the factors she should consider when evaluating the two financing options as outlined in Part B of the scenario. You are not required to perform any calculations for this part.