Venables plc. has a current equity market capitalisation of 300 million and corporate bonds in issue with a market value of 100 million. Its optimal level of financial gearing is thought to be 30%.

It is considering raising additional capital of 80 million so that it can take advantage of acquisition opportunities as they arise but is unsure whether it should raise this by issuing equity or bonds.

Required:

1. Advise the company of the primary considerations to take into account about the alternate sources of additional capital that are under consideration.

(8 marks)

2. Calculate the companys current level of financial gearing and, with reference to the trade-off theory on capital structure, clearly explain the impact upon the companys weighted average cost of capital if it were to raise the additional capital by issuing equity.

(4 marks)

3. Calculate the companys level of financial gearing if it were to raise the additional capital by issuing bonds and, with reference to the trade-off theory on capital structure, clearly explain the impact of this upon the companys total market value.