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1 Requirements Evaluate the effect the two financing alternatives will have on Henderson's net income and earnings per share two years from now. Complete the
1 Requirements Evaluate the effect the two financing alternatives will have on Henderson's net income and earnings per share two years from now. Complete the memo to Henderson's management discussing the advantages and disadvantages of borrowing and of issuing common stock to raise the needed cash. Which method of raising the funds would you recommend? 1. 2. Print Done 1 More Info The board of directors is considering obtaining the $8.5 million either by borrowing at 8% or by issuing an additional 200,000 shares of common stock. This year the company has earned $5.5 million before interest and taxes and has 200,000 shares of $1-par common stock outstanding. The market price of the company's stock is $42.50 per share. Assume that income before interest and taxes is expected to grow by 10% each year for the next two years. The company's marginal income tax rate is 40% PrintDone Henderson Medical Goodsis embarking on a mass e expansion. Assume plans call for opening 20 new stores during he next two years. Each store s scheduled o be 30% larger than he company's ex s ng location and with more elaborate displays. Management estimates that company operations will provide $1.0 million of the cash needed for expansion. Henderson Medical must raise the remaining $8.5 million from outsiders of en g more items ofinventory Click the icon to view information on raising the additional funds.) Read the requirements Requirement 1. Evaluate the effect the two financing alternatives will have on Handerson's net income and earnings per share two years from now Begin by selecting the labels needed to analyze the effect of the alternatives on net income and to show earnings per share after the expansion. Next, enter the amounts to show the effect of the borrowing alternative, then enter the amounts to show the effect of the shares of stock altemative. (For amounts with a $0 balance, make sure to enter "0" in the appropriate column. Round the EPS calculation to two decimal places. Enter amounts in dollars instead of millions.) Alternative 1 Alternative 2 Borrow $8.5 mlionIssue 200,000 shares at8% of stock Less Less: Requirement 2. Complete the memo to Henderson's management discussing the advantages and disadvantages of borrowing and of issuing common stock to raise the needed cash. Which method of raising funds would you recommend? To Management of Henderson Medical Goods Subject Advantages and disadvantages of borrowing versus issuing stock to raise cash for expansion The advantages and disadvantages of borrowing to raise cash for expansion are as follows: (If a box is not used in the table, leave the box empty, do not select a label.) Advantages Disadvantages The advantages and disadvantages of issuing stock to raise cash for expansion are as follows: (If a box is not used in the table, leave the box empty, do not select a label.) borroing issuing stock The method of raising funds that I would recommend depends upon the goal of the company in relation to this plan. If the company is looking to select an expansion plan that results in a higher earnings per share I would recommend 1 to raise cash for expansion If the company is looking for a-safe, means of raising cash I would recommend
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