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Finance a new warehouse project with two options

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Suppose you are a CFO of a retail business, which is cash rich from Operation Cash flows. Your firm is going to finance a new warehouse project with two options:

Option 1: 50% of debt and 50% of equity;

Option 2: 70% of debt and 30% of equity;

As a CFO you need to make the capital structure decision. Which option you will choose and why? (Suppose your company credit rating is A- and your bond issuance cost is around 5% before tax, your tax rate is around 20% and your shareholder's dividend requirement is around 4%).

Reference no: EM133109995

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