Domina Coconsidering raising some new finance but there is disagreement at the Board level how best to proceed.

The managing director thinks that the company should retain control in the hands of existing and loyal shareholders. The finance director feels that the gearing level should be allowed to increase to benefit from the tax relief allowed on interest.

The existing equity is quoted at 4.20cum dividend with an imminent dividend of 0.16due any day. The company earnings have grown at a fairly steady rate of 8% over recent years, but expectations are for growth to be 2% points better in the future.

The company's debt is 4% irredeemable bonds, which were issued at a 5% discount of 95. They have a nominal value of 100 but are currently quoted at 80 the interest having just paid. The corporation tax rate is 25%.

a) Assuming the business wants to retain control in the hands of the existing shareholders, how should it seek to raise new finance?

Select one:

a.A placing of new shares via a loyal broker

b.A further public offering of shares

c.A rights issue where it is expected that 95% of the existing shareholders will accept the offer

d.Issue new debt

b)Assuming the business wants to maximise the tax shield on the new finance, how should it raise the money?

a.A placing of new shares and 10,000,000of preference shares

b.Accepting a venture capital offer which includes 5,000,000of 4% redeemable bonds and some shares

c.Sell redeemable debt with market value 12,500,000with interest at 5%. The redemption value will make up 25% of the market value

d.Sell 12,000,000 irredeemable debt with interest at 5.25%

c)What is the cost of equity?

Select one:

a.14.0%

b.14.4%

c.12.3%

d.14.3%

d)What is after tax cost of debt?

Select one:

a.4.00%

b.5.00%

c.3.56%

d.3.75%

e)In part c) of this question, the cost of equity options for your answer are significantly greater than the cost of debt choices in part d). The main reason for this is:

Select one:

a.The total risk level in the business

b.The specific risk in the business

c.The tax shield

d.The level of systemic risk in the business