I need to determine how the new coding infrastructure should be financed, considering the funding options available as well as the current capital structure on 31 May 2021 using book values. (Assume preference shares are redeemable and therefore categorised as debt)

Relevant information:

Extract from statement of financial position at 31 May 2021

Equity and Liabilities

Ordinary shares (80 cents each) R500 000

Retained income R720 000

Shareholders' capital and reserves R1 220 000

15% preference shares (R100 each) R120 000

Long term loan - Bank (16.67%) R680 000

Total equity and liabilities R2 020 000

Additional information:

1. Ordinary share dividends declared and paid in the previous 5 years were as follows:

Year Dividend per share

2017 72 cents

2018 80 cents

2019 91 cents

2020 95 cents

2021 105.2 cents

The board of the company intends to maintain the average growth in dividends

2. The market price for ordinary shares is currently R12 per share and preference shares is R96 per share. New issues will have no effect on these prices, although ordinary share issue costs will be 4% per share issued

3. The company aims to maintain a debt: equity ratio of 1:1 going forward (based on book values)

4. To service the new blockchain technology clients, the company is planning to buy new high tech coding infrastructure at a cost of R800 000 at the start of the new financial year. The company will use this infrastructure for 5 years and then scrap it for R50 000.

5. The following options are available to finance the new initiative:

- New ordinary shares can be issued (retained earnings cannot be utilised).

- A maximum of 4 000 additional 15% preference shares of R100 each can be issued.

- A loan from Crypto Bank of R200 000 at prime + 800 basis points.

- A top-up loan from FNB Bank of R50 000 at the same rate as the existing loan, which is considered to approximate the fair market interest rate.

The loans can only be taken at the total amounts as made available by the banks.

6. Company tax rate of 28% and an Allowance on new coding infrastructure of 20% per annum. The prime lending rate is currently 10,5% and is expected to stay unchanged for the foreseeable future. The required rate of return on preference shares is 11%.