Management are trying to decide on financing structure

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Reference no: EM13913607

Fox Ten Limited (FTL) is a new company and management are trying to decide on a financing structure. They need to raise funds of $15 million and are deciding between the following options:

The first option is to use 90% equity and 10% debt. It will issue ordinary shares at $3.00 each and borrow the remainder at an interest cost of 9% p.a.

–The second option is funding 40% of the firm with debt and the balance with ordinary shares at an issue price of $3 per share. FTL has been advised that the cost of debt will rise to 12% pa in this case due to the increased financial risk. The tax rate is 30%.

(a) How many shares will be issued under each option?

Reference no: EM13913607

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