Financing alternatives The Howe Computer Company has growth rapidly during the p
ID: 2750391 • Letter: F
Question
Financing alternatives
The Howe Computer Company has growth rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of credit has risen to $140,000, carrying a 8% interest rate, and Howe has been 30 to 60 days late in paying trade creditors.
Discussions with an investment banker have resulted in the decision to raise $220,000, at this time. Investment bankers have assured Howe that the following alternatives are feasible (flotation costs will be ignored):
Alternative 1: Sell common stock at $12 per share.
Alternative 2: Sell convertible bonds at a 8% coupon, convertible into 70 shares of common stock for each $1000 bond (i.e., the conversion price is $14.29 per share).
Alternative 3: Sell debentures with a 8% coupon; each $1000 bond will have 70 warrants to buy 1 share of common stock at $14.29.
Keith Howe, the president, owns 85% of Howe's common stock and wants to maintain control of the company; 55,000 shares are outstanding. The following are summaries of Howe's latest financial statements:
Market price of stock:$5.20
- Show the new balance sheet under each alternative. For alternative 2 and 3, show the balance sheet after conversion of the debentures or exercise of the warrants. Assume that $140,000, of the funds raised will be used to pay off the bank loan and the rest used to increase total assets. Round your answers to the nearest dollar.
Total assets for Alternative 1 $_____ Total assets for Alternative 2 $_____
Total assets for Alternative 3 $_____
Show Keith Howe's control position under of each alternative, assuming that the does not purchase additional shares. Round your answers to the whole number
Original Plan I Plan II Plan III
Percent ownership 85% ____% _____% _____%
What is the affect on earnings per share of each alternative if it is assumed that earnings before interest and taxes will be 25% of total assets? Round your answers to the nearest cent.
Original Plan I Plan II Plan III
Earnings per share $0.35 $____ $_____ $_____
What will be the debt ratio under each alternative? Round your answers to the whole number.
Original Plan I Plan II Plan III
Debt/assets ratio 71% ____% _____% _____%
Balance sheet Current liabilities $195,000 Common stock, $1 par 55,000 Retained earnings $25,000 Total assets $275,000 Total liabilities and equity $275,000 Income Statement Sales $560,000 All costs except Interest 515,200 EBIT $44,800 Interest $13,000 EBT $31,800 Taxes $12,720 Net income $19,080 Shares outstanding 55,000 Earnings per share $0.35 Price/earnings ratio 15Market price of stock:$5.20
- Show the new balance sheet under each alternative. For alternative 2 and 3, show the balance sheet after conversion of the debentures or exercise of the warrants. Assume that $140,000, of the funds raised will be used to pay off the bank loan and the rest used to increase total assets. Round your answers to the nearest dollar.
Total assets for Alternative 1 $_____ Total assets for Alternative 2 $_____
Total assets for Alternative 3 $_____
Show Keith Howe's control position under of each alternative, assuming that the does not purchase additional shares. Round your answers to the whole number
Original Plan I Plan II Plan III
Percent ownership 85% ____% _____% _____%
What is the affect on earnings per share of each alternative if it is assumed that earnings before interest and taxes will be 25% of total assets? Round your answers to the nearest cent.
Original Plan I Plan II Plan III
Earnings per share $0.35 $____ $_____ $_____
What will be the debt ratio under each alternative? Round your answers to the whole number.
Original Plan I Plan II Plan III
Debt/assets ratio 71% ____% _____% _____%
Explanation / Answer
Balance sheet Under each Alternative
No. of shares to e issued after conversion of bond and excercise of warrant = 22000/$1000 x 70 = 15400
Additional paid in capital = 15400 x (14.29-1) = 204600
Statement showing computation of Keith howe's percentage holding
Statement showing computation of EPS
Computation of debt/asset ratio
Alternative 1 Alternative 2 Alternative 3 Assets 355000 355000 355000 Equity and liabilities Current liabilitie 55000 55000 55000 Common stock 73333 70400 70400 Additional pai in capital 201667 204600 204600 Retained Earnings 25000 25000 25000 355000 355000 355000Related Questions
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