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 long-term 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
Taxt at 34% = 4,600,000
EAT = 9,000,000


Develop an analysis of EPS and show the effect of any dilution 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

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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