FINANCING ALTERNATIVES The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2017. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 10% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows: The Severn Company: Balance Sheet as of December 31, 2016 (Millions of Dollars) s 255.00 Current assets Net fixed assets $900.00 Notes payable 450.00 Long-term debt (10%) 700.00 Common stock, $3 par Retained earnings Total liabilities and 60.00 335.00 $1,350.00 Total assets $1,350.00 equity The Severn Company: Income Statement for Year Ended December 31, 2016 (Millions of Dollars) Sales Operating costs Earnings before interest and taxes (10%) Interest on short-term debt Interest on long-term debt Earnings before taxes Federal-plus-state taxes (40%) Net income $2,475.00 2,227.50 $247.50 15.00 70.00 $162.50 65.00 $97.50 The probability distribution for annual sales is as follows Annual Sales (Millions of Dollars) Probability Probability 0.30 0.40 0.30 Dollars) $2,250 2,700 3,150 Assuming that EBIT equals 10% of sales, calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible sales level. Do not round intermediate calculations. Round your answers to two decimal places. Write out your answer completely. For example, 0.00013 million should be entered as 130 Annual Sales EPS under EPS under (Millions of Dollars) the debt financing the stock financing $2,250 2,700 3,150 Calculate expected EPS under both debt and stock financing alternatives. Do not round intermediate calculations. Round your answers to two decimal places. Write out your answer completely. For example, 0.00013 million should be entered as 130 Under the debt financing expected EPS is $ Under the stock financing expected EPS is Calculate EPS under both debt and stock financing alternatives. Do not round intermediate calculations. Round your answers to two decimal places, write out your answer completely. For example, 0.00013 million should be entered as 130 Under the dept financing EPs is Under the stock financing EPS is Calculate the debt-to-capital ratio and the times-interest-earned (TIE) ratio at the expected sales level under each alternative. The old debt will remain outstanding. [Hint: Notes payable should be included in both the numerator and the denominator of the debt-to-capital ratio.] Do not round intermediate calculations. Round your answers to two decimal places Under the debt financing The debt ratio is Times-interest-earned ratio is Under the stock financing: The debt ratio is Times-interest-earned ratio is
