ALTERNATIVES The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2020. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 9% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows: The Severn Company: Balance Sheet as of December 31, 2019 (millions of dollars) Current assets $ 900.00 Notes payable $ 255.00 Net fixed assets 450.00 Long-term debt (7%) 697.50 Common stock, $1 par 60.00 Retained earnings 337.50 Total assets $1,350.00 Total liabilities and equity $1,350.00 The Severn Company: Income Statement for Year Ended December 31, 2019 (millions of dollars) Sales $2,475.00 Operating costs 2,103.75 Earnings before interest and taxes (15%) $ 371.25 Interest on short-term debt 10.50 Interest on long-term debt 48.83 Earnings before taxes $ 311.92 Federal-plus-state taxes (25%) 77.98 Net income $ 233.94 The probability distribution for annual sales is as follows: Probability Annual Sales (millions of dollars) 0.30 $2,250 0.40 2,700 0.30 3,150 Assuming that EBIT equals 15% of sales, calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible sales level. Then calculate expected EPS and OePS under both debt and stock financing alternatives. Also calculate the debt-to-capital ratio and the times-
ALTERNATIVES The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2020. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 9% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows: The Severn Company: Balance Sheet as of December 31, 2019 (millions of dollars) Current assets $ 900.00 Notes payable $ 255.00 Net fixed assets 450.00 Long-term debt (7%) 697.50 Common stock, $1 par 60.00 Retained earnings 337.50 Total assets $1,350.00 Total liabilities and equity $1,350.00 The Severn Company: Income Statement for Year Ended December 31, 2019 (millions of dollars) Sales $2,475.00 Operating costs 2,103.75 Earnings before interest and taxes (15%) $ 371.25 Interest on short-term debt 10.50 Interest on long-term debt 48.83 Earnings before taxes $ 311.92 Federal-plus-state taxes (25%) 77.98 Net income $ 233.94 The probability distribution for annual sales is as follows: Probability Annual Sales (millions of dollars) 0.30 $2,250 0.40 2,700 0.30 3,150 Assuming that EBIT equals 15% of sales, calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible sales level. Then calculate expected EPS and OePS under both debt and stock financing alternatives. Also calculate the debt-to-capital ratio and the times-
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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Just looking for the answer for "Then calculate expected EPS and oEPS under both debt and stock financing alternatives".
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Transcribed Image Text:ALTERNATIVES The Severn Company plans to raise a net amount of $270 million to
finance new equipment in early 2020. Two alternatives are being considered: Common stock may be sold
to net $60 per share, or bonds yielding 9% may be issued. The balance sheet and income statement of the
Severn Company prior to financing are as follows:
The Severn Company: Balance Sheet as of December 31, 2019
(millions of dollars)
Current assets
$ 900.00
Notes payable
$ 255.00
Net fixed assets
450.00
Long-term debt (7%)
697.50
Common stock, $1 par
60.00
Retained earnings
337.50
Total assets
$1,350.00 Total liabilities and equity
$1,350.00
The Severn Company: Income Statement for Year Ended
December 31, 2019 (millions of dollars)
Sales
$2,475.00
Operating costs
2,103.75
Earnings before interest and taxes (15%)
$ 371.25
Interest on short-term debt
10.50
Interest on long-term debt
48.83
Earnings before taxes
$ 311.92
Federal-plus-state taxes (25%)
77.98
Net income
$ 233.94
The probability distribution for annual sales is as follows:
Probability
Annual Sales
(millions of
dollars)
0.30
$2,250
0.40
2,700
0.30
3,150
Assuming that EBIT equals 15% of sales, calculate earnings per share (EPS) under the debt financing
and the stock financing alternatives at each possible sales level. Then calculate expected EPS and OePS
under both debt and stock financing alternatives. Also calculate the debt-to-capital ratio and the times-
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