DEbt v Equity Question:

2. (E10.9) Trackwork Trains Ltd is considering these two alternatives for financing extensions: 1. Issue 60 000 shares at $40 per share. (Cash dividends have not been paid; nor is the payment of any cash dividend contemplated.) 2. Issue 13%, 10-year debentures at face value for $2.4 million. It is estimated that the company will earn $800 000 before interest and taxes as a result of the extension. The company has an estimated tax rate of 30% and has equity of $1 million prior to the new financing 1 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