Susan Thomas is about to start an earth-levelling operation company for which she requires a capital of about R 100 million to buy equipment and operate the company. Earnings before interest and tax are expected to amount to R 20 million (tax rate is 28%). The funds can be raised by issuing shares for the full amount or alternatively, half the requirements may be raised through the issue of 12% debentures.

Required:

a). Calculate the return on equity under both alternatives (ignore issue expenses).

b). Which factors to be considered by Miss Thomas in deciding on which financing alternative to adopt?