Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

5 Question 4 (20 marks) The Expand Company has recently obtained a listing on the Stock Exchange in 2016. Expand plans to raise a

image text in transcribed

5 Question 4 (20 marks) The Expand Company has recently obtained a listing on the Stock Exchange in 2016. Expand plans to raise a net amount of $54 million to expand its existing chain of retail outlets in early 2020. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 12% may be issued. The balance sheet and income statement of the company prior to financing are as follows: The Expand Company: Balance Sheet as of December 31, 2019 (Millions of Dollars) Current assets $100.00 Short-term debt $50.00 Net fixed assets 180.00 Long-term debt 140.00 Common stock, $3 par 12.00 Retained earnings 78.00 $280.00 Total assets The Expand Company: Income Statement for Year Ended December 31, 2019 Total liabilities and equity $280.00 Sales Operating costs (Millions of Dollars) Earnings before interest and taxes Interest on short-term debt Interest on long-term debt Earnings before taxes Taxes (20%) Net Income $495.00 445.50 $49.50 3.00 14.00 $32.50 6.50 $26.00 The annual sales after expansion is expected to increase to $540 million and the operating costs is expected to increase to $472.5 million. Assume the old debt will remain outstanding. Required: a. Prepare the forecast income statement under the debt financing and the stock financing alternatives. b. (4 marks) Calculate the earnings per share, the debt-to-capital ratio and the interest cover (EBIT/interest expenses) for the current year and the coming year under the debt financing and the stock financing alternatives. (9 marks) C. P d. Evaluate and comment on the above analysis and recommend which alternatives should be chosen. (4 marks) Comment on the view that businesses are unlikely to have high financial leverage and high operating leverage at the same time. (3 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management For Decision Makers

Authors: Peter Atrill

9th Edition

1292311436, 978-1292311432

More Books

Students also viewed these Finance questions

Question

What approach(es) to psychotherapy do you prefer?

Answered: 1 week ago