Chapter Twelve: Long-term External Finance

Questions:
12.18 How might companies raising finance internationally protect themselves against the
additional risk incurred when compared with domestic finance?

12.19 If you were the owner of a company which had decided to become public and listed, what
factors would govern the timing of the IPO? Would you use an underwriter? Explain the
issues.

Financial Problems:
12.4 Joseph Beete Enterprises (JBE) needs two new computers plus a rather expensive plan
printer. Joe, the owner/manager, goes to one dealer who offers a deal involving a
repayment free-period of 25 months, then 24 payments of $800/month. Another dealer
offers similar equipment financed by a finance-company loan requiring 20 payments
starting in one month of $750 per month. Which is the better deal for JBE? [LO1]

12.10 Greenridge is also offered loan funds of $100 000 at 8.2% p.a. after tax, compounded
semi-annually for 2 years. Greenridge is structured as a partnership and the partners pay
income tax at an average rate of 30%. The ATO allows depreciation at the rate of 50%
p.a. on this equipment. Advise Greenridge which is the better deal, the loan or a 2-year
lease with four equal payments of $26 674 starting with the first payment at the signing of
the contract. Assume for simplicity’s sake that the tax benefits from each lease payment
and the tax benefits forgone for depreciation are received without time lag in each half-
year period.

12.14 AON is a South Australian biotechnology company that develops vaccines. It needs to
raise $20 million to fund new research. It has 10 million ordinary shares on issue, and
these are currently selling on the ASX for $13.20. The directors decide to make a 1-for-5
rights issue at $10 subscription. What are the theoretical ex-rights and rights prices?

12.17 Planet Breeding Supplies Ltd is a small listed company which keeps stud beef bulls
which are performance tested for beef production through the growth rates of their
progeny. Planet sells tested semen across the nation and internationally. Planet wants to
raise more funding through an equity issue. Currently it has 20 million shares on issue
with a market price of $1.55. The company wants to raise about $5 million; costs of the
issue are expected to be $500 000. The directors are attracted by the idea of making the
issue price $1.20.
(a) How many new shares must be sold?
(b) How many shares must each shareholder own to be granted one right?
(c) What are the theoretical ex-rights and rights prices? [LO4]