Fox Ten Limited (FTL) is a new company and management are trying to decide on a financing structure

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June 7th, 2024

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 eachand 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 inthis case due to the increased financial risk.The tax rate is 30%.(a) How many shares will be issued under each option?(b) What will be the amount of interest paid p.a. under each option?Please show working out.

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