Ntenda Ltd. is a manufacturer of high quality couches. The management of the company is of the opinion that there are plentiful potentially profitable investment opportunities in the market now and in the near future. It was estimated from an internal investment schedule, that the company requires R8000 000 for new investments. The company now has to evaluate their options for financing projects that exploit these investment opportunities.

The company currently has 1000 000 shares in issue, trading a price of R10 apiece and a R3000 000 credit line with R1000 000 that can still be drawn upon and no other debt. Currently, the company has a beta of 1.2 associated with it.

The company has identified two possible options for raising the required funds. A seasoned offering and a new loan. If the company chooses a seasoned offering, it can issue up to 1000 000 shares on the open market at a price of R11 apiece. The company however expects that it will pay R1 per share in transaction, admin and bankers fees. It is expected that the companys beta will decrease to 1.1 if it chooses the seasoned offering. The other option is to raise the requisite funds through a bank loan at an annual rate of 12%. If the company chooses this option, it expects its beta to increase to 1.5. Similar companies have bonds that have a yield to maturity of 12%, the risk free rate is 6%, the market risk premium is 6% and the company is taxed at 28%.

The company currently has EBIT of R1000 000 with interest payments of R300 000 per annum and expects EBIT to grow by 5% per year for the foreseeable future after raising funds and undertaking these new investment opportunities, regardless of the source of financing. Dividends are expected to grow at a rate of 5.82% per annum for the foreseeable future if debt financing is not used, if debt is issued, it is expected to grow at a constant rate of 12.8% from the time that it is possible to pay a dividend.

The company has a target capital structure of 50% debt and 50% equity. seasoned offering, it can issue up to 1000 000 shares on the open market at a price of R11 apiece. The company however expects that it will pay R1 per share in transaction, admin and bankers fees. It is expected that the companys beta will decrease to 1.1 if it chooses the seasoned offering.

The other option is to raise the requisite funds through a bank loan at an annual rate of 12%. If the company chooses this option, it expects its beta to increase to 1.5. Similar companies have bonds that have a yield to maturity of 12%, the risk free rate is 6%, the market risk premium is 6% and the company is taxed at 28%.

The company currently has EBIT of R1000 000 with interest payments of R300 000 per annum and expects EBIT to grow by 5% per year for the foreseeable future after raising funds and undertaking these new investment opportunities, regardless of the source of financing. Dividends are expected to grow at a rate of 5.82% per annum for the foreseeable future if debt financing is not used, if debt is issued, it is expected to grow at a constant rate of 12.8% from the time that it is possible to pay a dividend.

The company has a target capital structure of 50% debt and 50% equity.

Required: Advise the company regarding which financing route it should take: Structure your advice as follows: Address the : 1. current value of the company (hint: its market value) 2. amount of shares the company should issue if it decides on the seasoned offering WACC under each option 3. intrinsic value of a share under each option (hint: use the DDM/ Gordon model) 4. value of the company under each option (hint: use the FCF model with earnings available to ordinary shareholders) 5. risk of the two options 6. future financing and financial flexibility implications of both options

Conclude your report with a recommendation based on the abovementioned factors.