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Sources of Finance


The board of directors of the HighTech Ltd (a family-owned company) believes that it could earn an additional $800,000 in profit before interest and taxes each year by expanding its range of products. However, the $4 million that the business needs for growth cannot be raised by the family. The directors, who wish to retain family control of the firm, must consider issuing securities to outsiders. They are considering three financing plans: • Plan A is to borrow at 11% over five years; • Plan B is to issue 100,000 ordinary shares at $40 each; • Plan C is to issue 40,000 preference shares at $100. HighTech Ltd presently has 500,000 ordinary shares issued. All two plans will raise the required $4million. The income tax rate is 30%. REQUIRED: a) Provide one advantage for the main external sources of finance available – ordinary shares, preference shares, and borrowing. (calculation are not required) b) Briefly describe each of the main sources of internal finance. (calculation are not required)