PPC Ltd, a supplier of cement, lime, and related products in southern Africa. It has 11 cement factories and a lime manufacturing facility in six African countries. PPC Ltd, is a considered to be a small cap stock in the JSE company within Basic Materials industry with R100 million in total capital. Recent broker reports from JP Morgan suggest a glowing future for the company given increase in infrastructure investment across the regions where the company operate. They believe the company is on the verge of announcing a range of new products which will raise the earnings growth rate for the company above the 25% pa level for the next 5 or more years.

In the week after the publication of the broker report, PPC Ltd share price jumped from R10 to R14. A small minority of the shares are held by the founding Pretoria based family with the balance equally divided between institutions and individual investors.

In the last financial year, the company reported earnings per share of R1.00. In the past it has relied mainly on its retained profits to fund its growth program especially its expansion to the DRC and Rwanda. It uses relatively little long-term debt in its capital structure (an average of 20% of total capital) and pays a modest dividend which is covered 5 times by earnings. The Basic Materials industry average debt to equity ratio is 32% and the sector price-to-earnings ratio is 9.

Management team led by the CEO Roland van Wijnen, viewed the recent jump in share price with some interest. They had plans to expand the business by an investment of R100 million in buildings and equipment and believed that the expected retained profits in the current year would not be sufficient for this purpose.

However, at the Board meeting at which these new plans were being finalized, the CEO presented a highly confidential report in which he suggested that the reports of the growth potential of the new product range were far too optimistic. Nevertheless, the Board felt that the company should go ahead with its expansion plans given the growth prospects and.

1. From PPC Ltd perspective, what are the pros and cons of each of the following five sources of funds?

1. Short-term debt (2 marks)

2. Venture capital (2 marks)

3. A rights issue (2 marks)

4. Long-term debt (2 marks)

5. Convertible debentures (2 marks)

2. In your capacity of being a Corporate Finance Analyst, clearly explain which source of funds you would advise the Board of PPC Ltd to use in order to fund their new expansion. Include calculations necessary to support your recommendation. (15 marks)