ebt Corporation is an innovative firm which has idea to enter the military industry. That needs not only more shareholders capital but also authorisation from State Military Department. Due to the latest business developments company is optimistic with its future. By now company has number of shareholders and Debt Co is a NASDAQ stock exchange listed company that manufactures mostly consumer products and it is planning to expand its existing business. The investment cost $$5$million will be met by a $1$for $4$rights issue. The current share price of Debt Co is $$2\mathrm{.}50$per share and the rights issue price will be at a $20\%$

$$discount to this. The finance director of Debt Co expects that the expansion of existing business will allow the average growth rate of earnings per share over the last four years to be maintained into the foreseeable future. The earnings per share and dividends paid by Debt Co over the last five years are as follows:

$20002001200220032004$

$$ Earnings per share, cents $27\mathrm{.}729\mathrm{.}029\mathrm{.}030\mathrm{.}232\mathrm{.}4$

$$ Dividende per share, cents $12\mathrm{.}813\mathrm{.}513\mathrm{.}514\mathrm{.}515\mathrm{.}0$

$$ Debt Co has a cost of equity of $10\%.$The price$/$earnings ratio of Debt Co has been approximately constant in recent years. Ignore issue costs. Required:

$1.$Calculate the existing price$/$earnings ratio?

$2.$Calculate earnings per share following expansion!

$3.$Calculate the expected share price following the proposed business expansion using the price$/$earnings ratio method?

$4.$Is it correct to apply existing PE ratio to the revised EPS for Debt Co$?$

$$Comment your answer! Which part of the case text can help to your answer