There are two alternatives:

Alternative $1$: Issue $$30$ million of $7\%$ corporate bonds. These would be issued on $1$ July $2022$

at a $5\%$ discount and would be repayable on $30$ June $2027$ at their nominal value. Interest would

be payable annually in arrears on $30$ June each year

Alternative $2$: Raise a bank loan of $$28\mathrm{.}5$ million on $1$ July $2022.$ The interest rate would be

$5\%$ per annum for the first $3$ years and $10\%$ per annum for the following $3$ years. The loan

would be repayable on $30$ June $2038.$

Interest would be payable annually in arrears on $30$ June each year. Assume that interest paid

can be relieved for tax at a rate of $30\%.$ Assume tax is payable at the end of the year in which

the taxable profits arise and sufficient profits exist to set off all interest payments.

Required

$($a$)$ Calculate the after$-$tax cost of debt for each of the two alternatives.

$($b$)$ Identify any further factors that would need to be considered, other than the cost of debt,

before choosing between these two alternatives.

$($c$)$ Write a memorandum to the board, as a member of ABC $\text{'}$s treasury department, which

discusses the financing options for expansion put forward at the board meeting. In so doing,

evaluate the comments of the directors.QUESTION $2[25$ MARKS$]$

ABC, a listed company, runs a chain of $26$ garden centres which sell plants, gardening

implements and a range of other gardening products. It is listed on an international stock

exchange and it has an accounting year end of $30$ June.

The company plans to open three new garden Super Centres in $2023.$ Unlike existing stores,

they will also sell garden furniture.

Each of the three new stores will cost $$6$ million to build and each will carry $$3\mathrm{.}5$ million of

stocks. The following budgeted summary statement of financial position at $30$ June $2022$

$($which excludes the three new Super Centres$)$ was presented at a meeting of the board:

The statement of financial position valuation for land and buildings reflects their current

market values.

Chief Executive

'I believe that we should raise new equity to finance the new Super Centres. Our share price

has risen from $$4$ a year ago to $$6$ today. I believe that we should take advantage of this high

share price and issue shares now in case the share price falls again. Moreover, our dividend

yield is only $3\%-$ this is cheap finance at low risk.$\text{'}$