Intraconnect $($Pty$)$ Ltd$.$ is a tech company that links business applications with each other, and the company is growing rapidly. The company$$s board of directors needs guidance with regard to its capital structure decision for next year. The company can either list $($IPO$)$ on the Johannesburg Stock Exchange $($JSE$)$ or turn to credit providers for funding. The investment schedule for next year contains planned expenditure of R$100$ million.$$

Currently, the company has R$10$ million in retained earnings which it wishes to keep as a reserve and not subtract from the funding requirements $($which can be assumed to be total equity$),$ R$50$ million in non$-$interest$-$bearing debt from its founders and R$60$ million in assets.$$

Details of the proposed financing options are as follows:

$$ A brief roadshow indicated that investors value the company at R$2\mathrm{.}50$ per share. If the company lists on the JSE, it is expected that it will have to under$-$price its shares by $20\%.$ The share price is strongly expected to rebound to R$3\mathrm{.}00$ at the end of the day however, due to support from the underwriting banks.$$

$$ A preferred credit provider can provide a loan worth the full R$100$ million at a cost of $10\%$ per annum. The rate was agreed upon due to a very similar company having a yield to maturity on its bonds of $10\%.$

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The company always uses the bond yield plus a risk premium method to estimate its cost of equity. A risk premium of $6\%$ is added to the yield of very similar company$$s bonds.$$

Earnings before interest and tax $($EBIT$)$ for the coming year is expected to be R$45$ million.

The company is taxed at $27\%.$

Required:

Evaluate the financing options available to the company by doing the following:

a$.$ Calculate the WACC, ROE and debt ratio under both respective capital structure options.$(15)$

b$.$ Advise the board regarding both possible structures based on your calculations, focusing on profitability, risk, control and flexibility.$(10)$