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 12% 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) Current assets $ 900.00 Notes payable $ 255.00 Net fixed 450.00 Long-term debt (10%) 700.00 assets Common stock, $3 par 60.00 Retained earnings 335.00 Total assets $1,350.00 Total liabilities and $1,350.00 equity The Severn Company: Income Statement for Year Ended December 31, 2016 (Millions of Dollars) Sales $2,475.00 2,227.50 $247.50 16.00 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 70.00 $161.50 64.60 $96.90 The probability distribution for annual sales is as follows: Annual Sales (Millions of Dollars) Probability 0.30 $2,250 0.40 2,700 0.30 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 CEPS 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 CEPS is $ Under the stock financing OEPS 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 Which financing method do you recommend? Equity 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 12% 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) Current assets $ 900.00 Notes payable $ 255.00 Net fixed 450.00 Long-term debt (10%) 700.00 assets Common stock, $3 par 60.00 Retained earnings 335.00 Total assets $1,350.00 Total liabilities and $1,350.00 equity The Severn Company: Income Statement for Year Ended December 31, 2016 (Millions of Dollars) Sales $2,475.00 2,227.50 $247.50 16.00 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 70.00 $161.50 64.60 $96.90 The probability distribution for annual sales is as follows: Annual Sales (Millions of Dollars) Probability 0.30 $2,250 0.40 2,700 0.30 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 CEPS 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 CEPS is $ Under the stock financing OEPS 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 Which financing method do you recommend? Equity