Case study $2$

Paisley Brothers plc$,$ a company producing loud paisley shirts, has net operating

income of $2000$ and is faced with three options of how to structure its debt and

equity:

a$)$ To issue no debt and pay shareholders a return of $9\%$;

b$)$ To borrow $5000$ at $3\%$ and pay shareholders an increased return of $10\%$

c$)$ To borrow $9000$ at $6\%$ and pay a $13\%$ return to shareholders.

Assuming no taxation and a $100\%$ payout ratio, determine which financing

option maximises the market value of the company.