AJ Pty. Ltd. is in need of $100,000 additional financing to support expansion plans. As...
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AJ Pty. Ltd. is in need of $100,000 additional financing to support expansion plans. As owner-manager of AJ, you are uncertain about whether you should provide the firm with a loan or with additional equity capital. The combined federal and provincial corporate tax rate is 50%. Your personal federal tax rate is 29% and the provincial tax rate is 11.16%. If you make a loan, the interest rate would be set at 12%. Conversely, if equity capital is purchased, you expect the dividend yield to be 4% (that is, for each $100 stock purchased, the annual dividend will be $4).
Required:
Should you, as owner-manager, provide the firm with a loan or with new equity financing?
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