Donkey Ltd’s equity is as follows: Share capital $5 000 000 Retained earnings and reserves 2 000 000 Equity $7 000 000 Donkey Ltd plans to expand its operations by establishing a branch in Thailand. The new branch will cost $3.5 million. Expected profit before tax and interest when the new branch is operational is $2.2 million. The tax rate is 30%. Donkey Ltd is considering two financing alternatives: Borrow $3.5 million at 8% interest. Issue 100 000 $35 shares. Required Which funding alternative yields the higher return on equity? What other factors should be considered
Donkey Ltd’s equity is as follows: Share capital $5 000 000 Retained earnings and reserves 2 000 000 Equity $7 000 000 Donkey Ltd plans to expand its operations by establishing a branch in Thailand. The new branch will cost $3.5 million. Expected profit before tax and interest when the new branch is operational is $2.2 million. The tax rate is 30%. Donkey Ltd is considering two financing alternatives: Borrow $3.5 million at 8% interest. Issue 100 000 $35 shares. Required Which funding alternative yields the higher return on equity? What other factors should be considered
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Donkey Ltd’s equity is as follows:
Share capital $5 000 000
Equity $7 000 000
Donkey Ltd plans to expand its operations by establishing a branch in Thailand. The new branch will cost $3.5 million. Expected profit before tax and interest when the new branch is operational is $2.2 million. The tax rate is 30%. Donkey Ltd is considering two financing alternatives:
-
Borrow $3.5 million at 8% interest.
-
Issue 100 000 $35 shares.
Required
Which funding alternative yields the higher return on equity? What other factors should be considered?
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