Donkey Ltd’s equity is as follows: 

Donkey Ltd plans to expand its operations by establishing a branch in Thailand. The new branch will cost $3.5 million. Expected profit before tax and interest when the new branch is operational is $2.2 million. The tax rate is 30%. Donkey Ltd is considering two financing alternatives:

1. Borrow $3.5 million at 8% interest.

2. Issue 100 000 $35 shares.

Required

Which funding alternative yields the higher return on equity? What other factors should be considered?