AJ Pty. Ltd. is in need of $100,000 additional financing to support expansion plans.  As owner-manager of AJ, you are uncertain about whether you should provide the firm with a loan or with additional equity capital. The combined federal and provincial corporate tax rate is 50%.  Your personal federal tax rate is 29% and the provincial tax rate is 11.16%.  If you make a loan, the interest rate would be set at 12%.  Conversely, if equity capital is purchased, you expect the dividend yield to be 4% (that is, for each $100 stock purchased, the annual dividend will be $4).

 
Required:
Should you, as owner-manager, provide the firm with a loan or with new equity financing?

Answer rating: 100% (QA)

To determine whether you should provide the firm with a loan or new equity financing we need to ... View the full answer