Soylent Corp is considering to raise new capital for expansion. The company has the following alternatives: Option 1: Issue $1 million bonds at interest rate of 10.5% Option 2: Issue new shares at issue price of $5.00 per share. The present total market capitalisation of Soylent Corp is as follows: 500,000 common stocks with par value of $1.00 per share with current market price of $5.00 $2,500,000 10% coupon bonds valued at par $500,000 Current EBIT is $466,500 and the company is in the 40% tax bracket. Current P/E ratio is 10. With the expansion, Soylent Corp has developed an EBIT estimates of $780,000. Depending on the financing option chosen, the P/E ratio is expected to change as follows: Expected New P/E Option 1 (debt issue) 8 Option 2 (common stock issue) 11 Which financing option should be chosen? Why?
Soylent Corp is considering to raise new capital for expansion. The company has the following alternatives:
Option 1: Issue $1 million bonds at interest rate of 10.5%
Option 2: Issue new shares at issue price of $5.00 per share.
The present total market capitalisation of Soylent Corp is as follows:
|
500,000 common stocks with par value of $1.00 per share with current market price of $5.00 |
$2,500,000 |
|
10% coupon bonds valued at par |
$500,000 |
Current EBIT is $466,500 and the company is in the 40% tax bracket. Current P/E ratio is 10. With the expansion, Soylent Corp has developed an EBIT estimates of $780,000.
Depending on the financing option chosen, the P/E ratio is expected to change as follows:
|
Expected New P/E |
|
|
Option 1 (debt issue) |
8 |
|
Option 2 (common stock issue) |
11 |
Which financing option should be chosen? Why?
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