Orchid SA (OSA) manufactures plant-based vegetarian foodstuffs at its site near Madrid in Spain. It is a quoted company with a wide diversity of shareholders. The Board of Directors is planning to raise 19 million of new finance for a major expansion of its manufacturing capacity due to a massive upturn in demand for its foodstuffs. This will involve acquiring additional warehouse space, two new machines and hiring over 100 new employees. The CFO has proposed using either a rights issue at a 20% discount to market price or an issue of 2.5% bonds. In its most recent released set of financial statements, the Chairperson stated in her report that OSA's key corporate objectives are 'to continue to maximise shareholders' wealth and maintain continuous growth in earnings per share'. Recent extracts from the annual financial statements of OSA are as follows:

2020 2019 2018 2017

m m m m

Revenue 30.80 26.40 21.01 18.48

Operating profit 10.78 9.35 8.25 7.48

Profit after corporate taxation 6.05 5.17 4.51 3.96

Dividends 2.42 2.09 1.76 1.76

Ordinary share capital (par value 100) 6.05 6.05 6.05 6.05

Retained profit 15.07 11.44 8.36 5.61

10% bonds redeemable in 2027 (par value) 22.00 22.00 22.0022.00

Share price 9.50 6.31 3.69 2.94

The 10% bonds have consistently traded at 105% of their par value from 2017 to 2020. OSA's cost of equity has remained around 17% for the same period.

The following average statistics for the period 2017 to 2020 are available from the Vegetarian Foodstuff Manufacturing (VFM) trade body:

Return on capital employed 27%

Return on equity 21% Interest cover 9.0 times

Financial gearing (using market values) 30%

The general level of inflation over the period 2017 to 2020 has averaged 2.7% per year.

1. Using whatever financial and other analysis you consider appropriate, evaluate the financial performance of OSA and assess whether the company has achieved its stated corporate objectives. Show all workings.

2. If the new finance is raised via the proposed rights issue and the major expansion of business has not yet begun, calculate the theoretical ex-rights share price and comment on the impact of the rights issue on the company's share price, its earnings per share and its financial gearing.

3. Critically assess the relative merits of a rights issue and an issue of bonds as ways of raising the finance for the company's expansion.