PROBLEM 2 - Financing Choice (15 marks)

Med5000 inc. has been listed on Euronext compartment C since 2005. The most recent stock price is 13 euros. The Company was founded in 1992 by Jacques Martin who is still the CEO and chairman of the board of directors. The Martin family holds 60% of the company ownership and voting rights. Med500 inc. belongs to a research-intensive industry with significant investments in R&D projects. The Table below shows recent financial data about Med5000. Data in millions () 2019 2018 Shareholders Equity 125 115 Total Assets 350 330 Financial Debt 40 38 Cash and Cash equivalents 9 8 Profit from recurring operations 34 30 Operating Profit 30 28 Net cost of financial debt 3 3 Average stock price 12 11 Outstanding shares (in millions) 63 62 RATIOS Equity / Total Assets 35.7% 34.8% Financial Debt/Equity 0.32 0.33 Net Debt/Equity 0.25 0.26 Net Debt /profit from recurring operations 0.91 1.00 Operating profit /Net cost of financial debt 10.00 9.33 Cash/Total Assets 2.6% 2.4% INDUSTRY DATA Net Debt/Profit from recurring operations 1.9 1.8 REQUIRED The company in considering a new investment project whose value represent 30% of total equity. The companys CEO is contemplating two alternative financing sources: (1) use of financial debt to fund the project or (2) new share issue (capital increase) either in the form a rights offering (issue with rights) or a regular share issue without preferential subscription rights to existing shareholders. Among the two financing alternatives, which one would you recommend to Med5000 inc? You need to quantify the companys financing need, available debt capacity, the new share issue price and the number of shares to be issued (with rights or without rights).

Your answer should also discuss the pros and cons of the two financing alternatives to Med5000 inc. and explain which option you recommend to the company. Your answer should be fully justified and not exceed 12 lines.