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Option 2 : Raise debt finance

Advantages:

Debt tends to be cheaper than equity and it is also less risky to the investors being secured

against our assets. Interest is certain and it enjoys interest tax relief and helps lowers our cost of
capital as postulated by Modigliani & Miller with tax.

Disadvantages:

This is inflexible as we have to service the debt every year irrespective of our cash flows. Per

the classical theory of capital structure, there is a tipping point at which extra debt will start to
raise cost of capital and begin to depress our share price. Raising the full amount by debt will

see our gearing (D/E) rise from 40% to 135% (S$56,059 + S$58,000m divide by S$84,523m).
Even if we sourced part from the cash amount of S$7,826m, the gearing will drop only slightly to
126% (S$56,059 + S$58,000m - S$7,826m divide by S$84,523). This still appears dangerously

high. Our benchmark competitor doubled their gearing from 42% to 90% in 2014/15 and despite
an ROE of 56.17% which is double ours at 23% we were trading above them for most of 2015

till late July 2015 (See Appendix 2 & 3 of the case study). Based on the risk-return trade-off in
the Capital Asset Pricing Model (CAPM), it would clearly be suicidal to raise debt to pay this
fine. If we must nonetheless, we cannot let our gearing exceed that of V-Mobile as a worst case

scenario, meaning the highest we can raise is S$ 20,012m (S$84,523 * 90% - S$56,059).

Option 3: Raise equity finance

Advantages:

A rights issue would reduce our gearing and in theory increase our share price whilst solving the
above drawback of debt finance. It is also flexible as we are not constrained by fixed interest. It

will also reduce the risk of hostile takeover given our current depressed share prices.

Disadvantages:

This is the most expensive as shareholders are the last to be paid in the event of a liquidation

and have uncertain dividends especially in the light of our first reported loss with the prospects
of a first non-payment of dividends. It will dilute our earnings and ROE which is already less
than half that of V-Mobile. The shock with which the market received the news and the resulting

share price drop leaves us convinced shareholders will not be keen to take up a rights issue.
They may even be doubt our integrity on how the fine was handled (See section 5 ethics).

Developed by The CharterQuest Institute for 'The CFO Business Case Study Competition 2016'
www.charterquest.co.za | Email: thecfo@charterquest.co.za