Bagan Corporation, a profitable growth company with 200,000 shares of common stock outstanding, is in need of approximately $40 million in new funds to finance required expansion. Currently, there are no other equities outstanding. Management has three options open: a. Sell $40 million of 12-per cent bonds at face value. b. Sell shares of 10% preferred stock: 400,000 shares at $100 each (dividend $10 per share). c. Sell another 200,000 shares of common stock at $200 each. Operating income (before interest and income taxes) on completion of the expansion is expected to average $12 million per year; the income tax rate is 50%. Required: 1. Complete the schedule below and calculate the earnings per share of common stock. 12% Preferred Common

Bagan Corporation, a profitable growth company with 200,000 shares of common stock outstanding, is in need of approximately $40 million in new funds to finance required expansion. Currently, there are no other equities outstanding. Management has three options open: a. Sell $40 million of 12-per cent bonds at face value. b. Sell shares of 10% preferred stock: 400,000 shares at $100 each (dividend $10 per share). c. Sell another 200,000 shares of common stock at $200 each. Operating income (before interest and income taxes) on completion of the expansion is expected to average $12 million per year; the income tax rate is 50%. Required: 1. Complete the schedule below and calculate the earnings per share of common stock. 12% Preferred Common

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $860,000 next year and $1,340,000 in two years, including the proceeds from the liquidation. There are 38,000 shares of stock outstanding and shareholders require a return of 11 percent. a. What is the current price per share of the stock? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. The board of directors is dissatisfied with the current dividend policy and proposes that a dividend of $960,000 be paid next year. To raise the cash necessary for the increased dividend, the company will sell new shares of stock. How many shares of stock must be sold? What is the new price per share of the existing shares of stock? Note: Do not round intermediate calculations and round your answers to 2 decimal places,…
asmine Flowers (JF) must raise $345 million for its future expansion. To do so, JM expects to issue new common stock. Investment bankers have informed the company that the flotation costs will be 6.5% of the total amount issued and that the company will incur another $576,000 in costs associated with the issue. JF can issue its stock for $55 per share. How many shares JF
LL corporation has $500M of excess cash. The firm has no debt and 1K shares outstanding with a current market price of $20 per share. LL’s board has decided to pay out this cash as a one time dividend. What is the ex-dividend price of a share in a perfect capital market?
XYZ Inc., a firm with 4 million shares outstanding each earning $5 in an industry that has an average P/E ratio of 4, has hired an investment-banking firm to help it go public. XYZ will issue 1 million new shares and incur $450,000 in indirect costs combined with 7%-spread fees charged by the underwriter. What is the correctly valued offer price of the IPO?
Santos Unlimited (SU) was originally unlevered with 4500 shares outstanding. However, after a major financial restructure, SU now has $39000 of debt, with an annual interest expense of 7 percent. The restructuring has reduced the number of shares to 3800. A group of shareholders of SU are not convinced that this move towards adopting financial leverage is a good idea. Their main argument is that there is now some range of EBIT, however low, that will make the shareholders worse off than before. Help understand the situation better by computing the level of earnings before interest and tax (EBIT) that would make shareholders indifferent between being unlevered (i.e. not having any debt) and levered (i.e. having debt). Assume a 30 percent corporate tax rate. Answer: $
The net income of Progressive Corporation is $92,000. The company has 25,000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $1,790,000. The appropriate discount rate for the company is 11 percent and the dividend tax rate is zero. a. What is the current value of the firm assuming the current dividend has not yet been paid? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the ex-dividend price of the company's stock if the board follows its current policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Current value of the firm b. Share price
An all-equity firm currently has 1,000,000 shares of stock outstanding and is considering borrowing $5,000,000 at 10% and buying back one-fourth of those shares. Assume a tax rate of 30% and EBIT is $ 1,500,000. Should this company undertake the capital restructuring and why?
You have been asked to estimate the cost of capital for ABC Corporation. The companyhas 10 million shares and 200,000 bonds outstanding at par value $15,000. In addition, it has$500 million in short-term debt from bank. The target capital structure ratio is 70 percentequity, 20 percent long-term debt, and 10 percent short-term debt.The current capital structure has temporarily moved slightly away from the target ratio. Thecompany’s shares currently trade at $50 with a beta of 1.30. The book value of the shares is$45. The annual coupon rate of the bonds is 10 percent, they trade at 105 percent of par, andthey will mature in seven years. Interest on the short-term debt is 10 percent. The currentyield on ten-year government bonds is 7 percent. The market risk is 15 percent. The corporatetax rate applicable is expected to be 25 percent. What would be the appropriate cost of capital for the ABC Corporation? Explain!
Kinston Enterprises has a debt obligation of $47 million that is due now. The market value of Kinston's assets is $102 million, and the firm has no other liabilities. Assume that capital markets are perfect and that Kinston has 5 million shares outstanding. If Kinston decides to sell new shares to raise capital to pay its debt obligation, how many shares will be issued? 5.0 million 4.3 million 4.7 million 4.0 million
You currently own 1,500 shares of JKL, Inc. JKL is an all equity that has 700,000 shares of stock outstanding at a market price of $25 a share. The company's earnings before interest and taxes are $3,500,000. You believe that the JKL should finance 50 percent of assets with debt, but management refuses to leverage the company. Given that similar firms' pay 9 percent interest on their debt, answer the following questions. Part A: How much money should you borrow to create the leverage on your own? Assume you can borrow funds at 9 percent interest. Part B. How many additional shares of JKL stock must you purchase (using the borrowed funds in Part A) to create the leverage on your own?
Pettit Printing Company (PPC) has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company's EBIT is $12.68 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 65% (based on market values) or decreasing it to 35%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 9% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. PPC expects no growth in its EBIT, so gL is zero. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firm's WACC and total corporate value under each capital structure? Do not round intermediate…
8) Annalists of UBS Group (offers both wealth management and asset management services) believe the price for shares of TopBuild Corp. will go down in the near future. It was decided to sell short 10,000 shares of TopBuild Corp. at the current market price of USD 257 per share. The initial margin requirement is 60 percent. Which of the following statement is the most accurate regarding the proceeds from the short sale and the margin requirement that UBS Group is subject to on this short sale? Select one: He will need to leave the proceeds from the short sale USD 2,570,000 and contribute USD 1,542,000 as margin. He will only need to contribute USD 1,542,000 as margin. He will need to leave the proceeds from the short sale USD 2,570,000 and contribute USD 1,028,000 as margin. He will only need to contribute USD 1,028,000 as margin. He will only need to leave the proceeds from the short sale (USD 2,570,000) as deposit and does not need to contribute any…