QUESTION 1 36 Marks

Sonny_Boy Limited (SBL) which is expecting the earnings before interest and taxation

of R150,000 per annum on an investment R500,000, is considering the finalization of

their financial plan. SBL has access to raise funds of varying amounts by issuing

ordinary share capital (i.e. equity share capital), 12% preference share and 10%

debenture or any combination thereof. SBL is considering the following four options

to raise the required funds of R500,000.

1. By issuing ordinary share capital (equity share capital) at par.

2. 50% funds by equity share capital and 50% funds by preference shares.

3. 50% funds by equity share capital, 25% by preference shares and 25% by issue

of 10% debentures.

4. 25% funds by equity share capital, 25% as preference share and 50% by the

issue of 10% debentures.

Assume that SBL's tax rate is 28%

Required:

Calculate the earnings per share under the above four options. (28 marks)

Discuss which option would be the best for Clere Limited. (8 marks)