Quick Ltd needs to raise capital to undertake a new project. If they consider the firm’s shares are currently over-valued by the market they will raise funds by issuing shares. Otherwise they plan to organise a variable rate loan with their investment bank. The finance officer at Quick Ltd. has gathered the following information:
Current price of Quick Ltd’s shares is $5.50. Last dividend paid to shareholders was 40c per share. The sales and accounting departments have estimated that earnings are expected to grow at a healthy rate of 8% pa. However, this rate is only expected to be sustainable for the next three years. After the three years it is expected that the earnings growth rate will decrease to a stable 4% pa, and continue at 4% pa into the foreseeable future. The finance department has estimated that given Quick Ltd’s beta and their projections of market rate, the appropriate discount rate for Quick Ltd’s equity is 13% pa. Should Quick Ltd raise the required capital by issuing equity?
The question belongs to Finance and it discusses whether or not a company should issue equity with a given set of assumptions and forecasts.
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