Drake plc is financed by 6 million ordinary shares of 50cents each, which are currently being traded at 160cents. The company’s after tax cost of equity is 16%. The company has a policy of returning all after tax earnings to shareholders as dividends. The company suffers corporation tax at 30%.
The company has the opportunity to undertake a project that would involve an initial outlay of $3.6m leading to annual savings of $500,000 in perpetuity. It is believed that the project would have the same operating risk characteristics as the company’s existing business activities. The Board of Petra plc is considering financing the new project through the issue (at par) of $3.6m 10% debentures.
1 - Is this project viable if it were financed exclusively by equity?
2- is this project viable if it were financed by the proposed debenture issue?
The company has the opportunity to undertake a project that would involve an initial outlay of $3.6m leading to annual savings of $500,000 in perpetuity. It is believed that the project would have the same operating risk characteristics as the company’s existing business activities. The Board of Petra plc is considering financing the new project through the issue (at par) of $3.6m 10% debentures.
1 - Is this project viable if it were financed exclusively by equity?
2- is this project viable if it were financed by the proposed debenture issue?