Magic Candles financing decision

You are a CFO of Magic Candles Inc. public company with the stocks traded at TSX. You are located in New Westminster, BC. The marketing team of your company has just come up with a new product strategy where the company needs to start producing candles from eco-friendly materials. The estimated investment into this new production is $1,000,000. The company has 1.0 debt/equity ratio. The book value of assets is $9,000,000. The CEO is very excited about this new endeavour and asked you to decide how you are going to finance it. The company does not have internal funds available and needs to use debt or equity financing. The financing should be attractive for investors and at the same time be a best option for the company.

The options you are thinking about are: 1. Issue bonds. 1,000 bonds with a face value of $1,000 and 8% semi-annual coupon with 5 years to maturity. You think that the bond can be priced in the market for $980. 2. Issue shares and place them at TSX. To finance the new product line, the company can issue 9,000 shares. The last dividend paid was $4.50, the dividends are growing at a constant rate of 2.8%. 3. Take a loan for 5 years at 7% compounded semi-annually.

Questions: 1. What is more attractive for investors: bonds or stocks? Provide calculations for each of the options. Additionally, discuss risk and reward in relation to these options as well as other advantages and disadvantages of debt and equity for an investor.

2. What is the best financing for the company? Remember that debt costs are expenses and are deducted before taxation. The company tax rate is 30%. Additionally, discuss advantages and disadvantages of debt and equity for this company (capital structure and impact on cash flows). Provide calculations to support your argument.