Question
Early in the 2020, Baladna Co. prepared an expansion plan. The plan requires an increase in in both property, plant and equipment and inventory by
Early in the 2020, Baladna Co. prepared an expansion plan. The plan requires an increase in in both property, plant and equipment and inventory by $190,000,000 and $10,000,000 respectively. The following three alternative financing plans have been suggested by the firms investment bankers:
Plan I: issue preferred stock at par.
Plan II: issue common stock at $10 per share.
Plan III: issue a 16% long-term bonds, due in 20 years, at par ($1,000).
- For the year ended December 31, 2020, compute the following ratios under each financing plan (assuming the same statement balances, except for the increased assets and financing; do not adjust retained earnings for the 2020 profits).
Plan A:
- Times interest earned
Plan B:
- Times interest earned
Plan C:
- Times interest earned
Income Statement |
For the Year Ended December 31, 2019 |
(in thousands except earnings per share) |
Sales $936,000 |
Cost of sales 671,000 |
Gross profit $265,000 |
Operating expenses: |
Selling $62,000 |
General 41,000 103,000 |
Operating income $162,000 |
Other items: |
Interest expense 20,000 |
Earnings before provision for income tax $142,000 |
Provision for income tax 56,800 |
Net income $ 85,200 |
Earnings per share $ 0.83 |
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