A company is planning the financing of a major expansion. It will use common stock to fund this expansion. The company currently has 300,000 shares outstanding selling at an average of $130 per share. It would sell an additional 50,000 shares to bring in an estimated $5 million. The new project is expected to raise EBIT by 18% when implemented. The company’s capital structure contains long-term debt of $10 million which pays interest of 11%. Current Income Statement Net Sales 66,000,000 COGS 42,000,000 Gross Profits 24,000,000 S and A Expenses 9,300,000 Operating Profits 14,700,000 Interest on Debt 1,100,000 EBT 13,600,000 Taxes at 34% 4,600,000 EAT 9,000,000 Develop an analysis of EPS and show the effect of any dilution of earnings. Develop the same analysis for an alternative issue of $5 million of 10% preferred stock, and an alternative issue of $5 million of 9% debt. Develop specific comparative costs of all three methods and discuss your findings.
A company is planning the financing of a major expansion. It will use common stock to fund this expansion. The company currently has 300,000 shares outstanding selling at an average of $130 per share. It would sell an additional 50,000 shares to bring in an estimated $5 million. The new project is expected to raise EBIT by 18% when implemented. The company’s capital structure contains long-term debt of $10 million which pays interest of 11%. Current Income Statement Net Sales 66,000,000 COGS 42,000,000 Gross Profits 24,000,000 S and A Expenses 9,300,000 Operating Profits 14,700,000 Interest on Debt 1,100,000 EBT 13,600,000 Taxes at 34% 4,600,000 EAT 9,000,000 Develop an analysis of EPS and show the effect of any dilution of earnings. Develop the same analysis for an alternative issue of $5 million of 10% preferred stock, and an alternative issue of $5 million of 9% debt. Develop specific comparative costs of all three methods and discuss your findings.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A company is planning the financing of a major expansion. It will use common stock to fund this expansion. The company currently has 300,000 shares outstanding selling at an average of $130 per share. It would sell an additional 50,000 shares to bring in an estimated $5 million. The new project is expected to raise EBIT by 18% when implemented. The company’s capital structure contains long-term debt of $10 million which pays interest of 11%.
Current Income Statement
|
Net Sales |
66,000,000 |
|
COGS |
42,000,000 |
|
Gross Profits |
24,000,000 |
|
S and A Expenses |
9,300,000 |
|
Operating Profits |
14,700,000 |
|
Interest on Debt |
1,100,000 |
|
EBT |
13,600,000 |
|
Taxes at 34% |
4,600,000 |
|
EAT |
9,000,000 |
- Develop an analysis of EPS and show the effect of any dilution of earnings.
- Develop the same analysis for an alternative issue of $5 million of 10% preferred stock, and an alternative issue of $5 million of 9% debt.
- Develop specific comparative costs of all three methods and discuss your findings.
Transcribed Image Text:.
1. A company is planning the financing of a major expansion. It will use common stock to fund this
expansion. The company currently has 300,000 shares outstanding selling at an average of $130 per
share. It would sell an additional 50,000 shares to bring in an estimated $5 million. The new project
is expected to raise EBIT by 18% when implemented. The company's capital structure contains long-
term debt of $10 million which pays interest of 11%.
Current Income Statement
Net Sales
COGS
Gross Profits
S and A Expenses
Operating Profits
Interest on Debt
EBT
Taxes at 34%
EAT
66,000,000
42,000,000
24,000,000
9,300,000
14,700,000
1,100,000
13,600,000
4,600,000
9,000,000
Develop an analysis of EPS and show the effect of any dilution of earnings.
Develop the same analysis for an alternative issue of $5 million of 10% preferred stock, and an
alternative issue of $5 million of 9% debt.
Develop specific comparative costs of all three methods and discuss your findings.
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