Question 1 (30 Marks)

Securotech (Pty) Ltd requires additional funding to develop a face recognition system to add to its current line of security products. Thecompany requires an additional R4.2 million for this purporse but is uncertain whether to raised funds from additional equity finance or by making use of debt finance. As the project team's finance representative, you need to assist the team in identifying and recommending the best financing option to management. The following information is available to the team.

Statement of financial position as at 28 February 2021

Assets
Non-current Assets				4 500 000
Current Assets				1 560 000
Total Assets				6 060 000
Equity and Liabilitties
Eguity:				3 550 000
Share capital (300 000 issued ordinary shares				2 300 000
Non-distributable reserves				750 000
Distributable reserves				500 000
Liabilities:
Long-term Liabilities				2 000 000
15% Non-convertible preference shares				800 000
long-term loan				1 200 000
Current Liabilities
Trade and other payables				450 000
Bank Overdraft				60 000
Total equity and liabilites				6 060 000

Additional Information:

The shareholders' required return (k) is 18%.

The company recently paid a dividend of R9.50 per share and expects dividends to increase by 4% per year.

Preference shares are currently trading in the market at 12%.

The long-term loan matures in six years. The loan's interest is 11.2% per annum, while the current market rate for long term loans is 16%.

The Corporate tax rate is 28%.

The Company has set its target debt: equity ratio at 30:70.

Required:

Show all calculations used to prepare the answer and round off all answers to the nearest rand.

Use the information provided to determine and recomment the best financing option for the project to Securotech's management.