The following information has been taken from the statement of financial position of Rose PLC, a listed company: Statement of Financial Position of Rose Plc as at 31/12/2020 'M 'M 50 Non-current assets Current assets Cash and cash equivalents Other current assets 4 16 20 Total assets 70 Equity and reserves Ordinary shares Reserves STI 15 29 44 6 Non-current liabilities 6% Preference shares 8% loan notes Bank loan 8 5 19 Current liabilities 7 Total equity and liabilities 70 Further Information on Rose plc The ordinary shares of Rose plc has a nominal value of 1 per share and a current ex- dividend market price of 6:10 per share. A dividend of 0.90 per share has just been paid. The dividends are expected to grow at 5% over the next three years. The 6% preference shares of Rose plc have a nominal value of 0.75 per share and an ex-dividend market price of 0.64 per share. The 8% loan notes of Rose ple have a nominal value of 100 per loan note and a market price of 103.50 per loan note. Annual interest has just been paid and the loan notes are redeemable in five years' time at par to nominal value. The bank loan has a variable interest rate. Rose plc pays corporation tax at a rate of 20%. Investment in facilities Rose plc's board is looking to finance investments in facilities over the next three years, forecast to cost up to 27m. The board does not wish to obtain further long-term debt finance and is also unwilling to make an equity issue. This means that investments have to be financed from cash which can be made available internally by using the profits. Board members have made a number of suggestions about how this can be done: Director A (Andrew) has suggested that the company does not have a problem with funding new investments, as it has cash available in the reserves of 29m. If extra cash is required soon, Rose plc could reduce its investment in working capital and use the money they have put aside for the day-to-day activities of the business. Director B (Brian) has suggested borrowing 10m or raising 10m in shares and also use 17m of their cash to pay the investment and pay 2m in a dividend. Director C (Colin) has commented that although a high dividend has just been paid, dividends could be reduced over the next three years, allowing spare cash for investment. Colin would prefer not to eliminate all the cash of the business as this is needed for day-to- day activities and his concern is it will cause liquidity issues. He is concerned not paying a dividend might have an impact on the market value of the shares once announced. (a) Calculate the cost of the ordinary shares (b) Calculate the cost of the preference shares (c) Calculate the cost of the loan notes (d) Discuss the views expressed by the three directors on how the investment should be financed and the impact on their choices. Note: Students should include Liquidity, Shareholder Expectations, Gearing, Risk, impacts of the overall company and impacts to shareholders. Calculate ratios where you feel appropriate