PART ONE

Wind energy ltd is a Zambian Company that develops wind farms and harnesses wind energy in North Western Province. It is a small company with five shareholders all of whom are involved in the running of the company.

The company is in the preliminary stages of developing a new product that will be sold to farmers. The companys projections show that profits of K1.3 million per annum are expected over the first five years, once sales commence.

In order to proceed with the project further finance of K1.5 million is required. Wind energy ltd expects to find the project through a mix of debt and equity finance, and is considering approaching financial markets.

REQUIRED

• Briefly explain any five factors that Wind Energy should take into account when deciding on the mix of debt and equity finance (5Marks)

Discuss the likely capital structure implications of the following two examples

• A company earns very little profits and pays no tax (2 Marks)
• Managers at a company believe the shares to be undervalued (3 marks)