QUESTION 4 - DEBT VS EQUITY FINANCING DECISION MAKING (15 Marks) White Snow Limited is a recently listed Australian company specialising in the production of gourmet flavoured chocolates. In December 2017 the directors of White Snow Limited decide that it is a favourable time for the company to investigate acquisition opportunities and need to consider financing options. White Snow currently has $50 million in share capital (10 million shares outstanding) with an EBIT of $15 million. The management team estimate that the cost of acquiring a mid-sized company will be $20 million which will increase current EBIT by 20%. Prevailing market interest rates indicate that White Snow could borrow at an annual rate of 8%. White Snow could issue new shares for $5 each. The company tax rate is 30%. Required: a) Using the template provided below, demonstrate the effect of financing this expansion through either debt or the issuance of shares calculating the Net Profit, ROE and EPS ratios for both options. (10 marks): Question 4a Answer EQUITY OPTION: DEBT OPTION: Issuing SHARES Borrowing for $20,000,000 $20,000,000 Share Capital before capital raising $50,000,000 $50,000,000 tit b) Summarise your recommendation below based on your findings in (a) including advantages and disadvantages of using debt and/or equity financing. (5 marks 1 mark per advantage/disadvantage) Question 4b