Domina Coconsidering raising some new finance but there is disagreement at the Board level how best to proceed.

The managing director thinks that the company should retain control in the hands of existing and loyal shareholders. The finance director feels that the gearing level should be allowed to increase to benefit from the tax relief allowed on interest.

The existing equity is quoted at 4.20cum dividend with an imminent dividend of 0.16due any day. The company earnings have grown at a fairly steady rate of 8% over recent years, but expectations are for growth to be 2% points better in the future.

The company's debt is 4% irredeemable bonds, which were issued at a 5% discount of 95. They have a nominal value of 100 but are currently quoted at 80 the interest having just paid. The corporation tax rate is 25%.

a) Assuming the business wants to retain control in the hands of the existing shareholders, how should it seek to raise new finance?

b)Assuming the business wants to maximise the tax shield on the new finance, how should it raise the money?

c)What is the cost of equity?

d)What is after tax cost of debt?

Answer rating: 100% (QA)

a To raise new finance while retaining control in the hands of existing shareholders the company sho... View the full answer