Tempo limited is a subsidiary of a Turkish company which manufactures household utensils. The company which is unlevered is currently financed by four million ordinary shares of Ghs 10.00 each par value. The shares has a market value of Ghs 13.50 per share. No debt finance has been used by the company. At the recent emergency board meeting to discuss the way forward as a result of the negative impact of the COVID 19 pandemic on the performance of the company, the Group manager of the company who was present told the shareholders that the company is planning to undertake a massive project expansion next year and suggested that the proposed project will be financed entirely by fixed interest debt. He proposed that the project be financed by Ghs 5,000,000 irredeemable debenture to be issued at par. At the subsequent meeting with company's directors and management, the finance director indicated that it is only possible to obtain debt finance equal to the entire cost of the project as the subsidiary has previously been all equity financed and has therefore considerable unused borrowing capacity.

According to his calculations after obtaining the debt capital for the project, Tempo will be at level of gearing which will be optimum to the company. Tempo's management team are, in principle, in favor of the expansion but there is considerable opposition of the use of debt finance and it is suggested that the project be funded by an issue of shares at their full market price.

Required:

Discuss any weakness of both the traditional and the Modigliani and Miller theories of capital structures and discuss how useful they might be in the determination of the appropriate capital structure of Tempo Limited.