Fox Ten Limited (FTL) is a new company and management are trying to decide on a financing structure. They need to raise funds of $15 million and are deciding between the following options:
The first option is to use 90% equity and 10% debt. It will issue ordinary shares at $3.00 each and borrow the remainder at an interest cost of 9% p.a.
–The second option is funding 40% of the firm with debt and the balance with ordinary shares at an issue price of $3 per share. FTL has been advised that the cost of debt will rise to 12% pa in this case due to the increased financial risk. The tax rate is 30%.
(a) How many shares will be issued under each option?