- Questo QUESTION SIX (a) The Directors of a company to be formed are considering three alternatives for raising K50 million to establish the business. These are given in the three scenarios below Scenario 1 Ordinary K10 par shares for K50 million Scenario 2 Ordinary K10 par shares for 8% Preferred K10 par shares for K40 million K10 million Scenario 3 Ordinary K10 par shares for 8% Preferred K10 par shares for 8% Bonds for K31 million K4 million K15 million The directors expect a 10% return on investment after tax but before servicing the K50 million. They are also desirous of transferring from profits to retained earnings K3 million each year. (0) Assuming a tax rate of 35%, prepare a statement showing the profit position and dividend available for ordinary shareholders for each of the financing alternatives, (9 marks) (ii) Make a recommendation as to the method of fund raising you favor, giving reasons for your choice as well as reasons for not favoring the other methods. In general, what factors would influence your choice of long term source of finance (10 marks) b) A company buys on terms of 1/10, net 30, but it has not been taking discounts and has actually been paying in 60 days. Accounts payable have risen to K250,000 and suppliers are now threatening to stop supplies unless the company begins making prompt payments. To become current on its account, the company can borrow a 1 year note from the bank at a rate of 15% discount interest, with an 18% for any compensating balance. Determine what action the company should take by calculating: 0 The cost of none free trade credit, and (ii) The cost of the bank loan. (6 marks) (25 marks)