Seagul Industries wishes to undertake a project that would cost R 500,000. The project has already been evaluated and has a positive net present value.
The decision facing the management is how to finance the project. Three alternative financing options are under consideration
·Issue 125 000 ordinary shares at R 4.00 each; or
·Issue 250,000 12% preference shares at R2.00 each; or
·Issue R 500,000, 8 year Debentures at a fixed interest rate of 14% p.a
The project is expected to generate an extra R 150,000 of earnings (before interest and taxes) each year. The company pays tax at 30% and follows a policy of paying a constant dividend on ordinary shares.