A company is planning the financing of a major expansion. it will use common sto

Question

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 longterm debt of $10 million which pays interest of 11%.

Current Income statement

Net sales 66,000,000
COGS 42,000,000
Gross Profit 24,000,000
S An A Expenses 9,300,000
Operating Profit 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 alternative issue of $5 million of 9% debt.

Develop specific comperative costs of all three methods and discuss your findings.

Explanation / Answer

Shares at present 300000 Additional shares 50000 Before issue of Additional Shares: Earnings Afer Tax / Net Income = $9,000,000 Earnig Per Share = Net Income / Total Shares = 9000000 / 300000 = $30 After Issue of Additional Shares: Earnings Afer Tax / Net Income = $9,000,000 Earnig Per Share = Net Income / Total Shares = 9000000 / 350000 = $25.71 Issue of 10% Preferred Stock : Preferred shares Worth = 5000000 Earnings After Tax = 9000000 Preferred Dividend (5000000*10%) = 500000 Income Available to Equity Shares = 8500000 Earnig Per Share = Net Income / Total Shares = 8500000 / 300000 = $28.33 Issue of 9% Debt Debt Worth = 5000000 Earnings After Tax = 9000000 Interest on Debt (5000000*9%) = 450000 Income Available to Equity Shares = 8550000 Earnig Per Share = Net Income / Total Shares = 8550000 / 300000 = $28.5 Findings:      If company issues additional equity shares EPS is $25.71, if 10% preffered stock issue's EPS is $28.33, but if 9% Debt issues EPS is $28.5. So if we want to give high Earning Per Share to equity shareholders we have to choose 9% 5 million Debt. It is the best alternative. Thank you... Shares at present 300000 Additional shares 50000 Before issue of Additional Shares: Earnings Afer Tax / Net Income = $9,000,000 Earnig Per Share = Net Income / Total Shares = 9000000 / 300000 = $30 After Issue of Additional Shares: Earnings Afer Tax / Net Income = $9,000,000 Earnig Per Share = Net Income / Total Shares = 9000000 / 350000 = $25.71 Issue of 10% Preferred Stock : Preferred shares Worth = 5000000 Earnings After Tax = 9000000 Preferred Dividend (5000000*10%) = 500000 Income Available to Equity Shares = 8500000 Earnig Per Share = Net Income / Total Shares = 8500000 / 300000 = $28.33 Issue of 9% Debt Debt Worth = 5000000 Earnings After Tax = 9000000 Interest on Debt (5000000*9%) = 450000 Income Available to Equity Shares = 8550000 Earnig Per Share = Net Income / Total Shares = 8550000 / 300000 = $28.5

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