RH plc RH plc manufactures machine tools. It has 2 million ordinary 1 shares in issue, quoted at 168 pence each, and 1 million 10% secured debentures quoted at par. To finance expansion the directors of the company want to raise 1 million for additional working capital. Cash flow from trading before interest and tax is currently 1 million per annum. It is expected to rise to 1.3 million per annum if the expansion programme goes ahead. To simplify placing a valuation of the company's equity, you should assume that: The forecast level of cash flow, and a tax rate of 33%, will continue indefinitely; The required rate of return on the market value of equity, 18% post tax, will be unaffected by the new financing; There is no difference between taxable profits and cash flow The company's directors are considering two forms of finance - equity via a rights issue at 15% discount to current share price, or 12% unsecured loan stock at par. Required: (a) Calculate for both financing options, the expected: (1) Increase in the market value of equity; (11) Debt: debt + equity ratio; Weighted average cost of capital (b) Assume you are the financial manager for RH plc. Write a report to the board advising which of the two types of financing is to be preferred. Include in your report brief comments on non-financial factors which should be considered by the directors before deciding how to raise the 1 million finance