SpringTime Ltd is considering these two alternatives for financing extensions: 1. Issue 70 000 shares at $20 per share. (Cash dividends have not been paid; nor is the payment of any cash dividend contemplated.) 2. Issue 10%, 10-year debentures at face value for $1.4 million. (Assume that 10% is also the market rate for similar securities.) It is estimated that the company will earn $500 000 before interest and taxes as a result of the extension. The company has an estimated tax rate of 30% and has equity of $2 million prior to the new financing.

Required

(a) Determine the effect on profit and return on ordinary shareholders’ equity for

(1) issuing shares and (2) issuing debentures.

(b) Discuss factors the company would need to consider in deciding the financing options.