For the year ended June 30, 2007, A.E.G. Enterprises presented the financial statements shown on page 280.

Early in the new fiscal year, the officers of the firm formalized a substantial expansion plan. The plan will increase fixed assets by $190,000,000. In addition, extra inventory will be needed to support expanded production. The increase in inventory is purported to be $10,000,000.

The firm’s investment bankers have suggested the following three alternative financing plans:
Plan A: Sell preferred stock at par.
Plan B: Sell common stock at $10 per share.
Plan C: Sell long-term bonds, due in 20 years, at par ($1,000), with a stated interest rate of 16%.

Required

a. For the year ended June 30, 2007, compute:
1. Times interest earned 2. Debt ratio 3. Debt/equity ratio 4. Debt to tangible net worth ratio

b. Assuming the same financial results and statement balances, except for the increased assets and financing, compute the same ratios as in

(a) under each financing alternative. Do not attempt to adjust retained earnings for the next year’s profits.

c. Changes in earnings and number of shares will give the following earnings per share: Plan A—0.73, Plan B—0.69, and Plan C—0.73. Based on the information given, discuss the advantages and disadvantages of each alternative.

d. Why does the 10% preferred stock cost the company more than the 16% bonds?

A.E.G. ENTERPRISES Balance Sheet for June 30, 2007 (in thousands) Assets Current assets: Cash Accounts receivable Inventory Total current assets Property, plant, and equipment Less: Accumulated depreciation Patents and other intangible assets Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Taxes payable Other current liabilities Total current liabilities Long-term debt Stockholders' equity: Preferred stock ($100 par, 10% cumulative, 500,000 shares authorized and issued) Common stock ($1 par, 200,000,000 shares authorized, 100,000,000 issued) Premium on common stock Retained earnings Total liabilities and stockholders' equity $ 50,000 60,000 106,000 $216,000 $504,000 140,000 364,000 20,000 $600,000 $ 46,000 15,000 32,000 $ 93,000 100,000 50,000 100,000 120,000 137,000 $600,000