SalMare (SML) is considering the establishment and construction of a fish farming and processing plant on the Namdal coast. The board just decided that 60% of the total investment of NOK 300 million will be debt-financed by issuing a bond loan with a term of 15 years and only 2% coupon rate.

The company's auditor agreed with the board meeting that this coupon rate will reduce effective borrowing costs as much as possible. In the board meeting, it was also decided that the rest of the financing needs will be provided through an equity issue aimed at existing shareholders. The company's shares are currently traded for NOK 154 on the Oslo Stock Exchange, while the required return on 15-year government bonds is 2%. For debt with the same maturity, SalMare's risk premium in the bond market is 2% in addition to the risk-free interest rate.

Advisor Enoksen in the investment bank BoldMand Flax expresses concern related to the completion of upcoming issues. He has therefore arranged a meeting with CFO Knutsen in SalMare.

(a) 10p Does Adviser Enoksen's concern seem justified? Explain.

(b) 10p Do you share the auditor's views on how SalMare should reduce its debt costs? Explain.

(c) 10p In the light of the conclusions in (a) and (b) above, does there appear to be any reason for Sal- change on any of the terms of the issues? Explain!