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Patterson Medical Goods is embarking on a massive expansion. Assume plans call for opening 20 new stores during the next two years. Each store is scheduled to be 30% larger than the company's existing locations, offering more items of inventory and with more elaborate displays. Management estimates that company operations will provide $1.0 million of the cash needed for expansion. Patterson Medical must raise the remaining $5 million from outsiders. Click the icon to view information on raising the additional funds.) Read the requirements. Requirement 1. Evaluate the effect the two financing alternatives will have on Patterson's net income and earnings per share two years from now. Begin by selecting the labels needed to analyze the effect of the alternatives on net income and to show earnings per share after the expansion. Next, enter the amounts to show the effect of the borrowing alternative, then enter the amounts to show the effect of the shares of stock alternative. (For amounts with a $0 balance, make sure to enter "0" in the appropriate column. Round the EPS calculation to two decimal places. Enter amounts in dollars instead of millions.) Alternative 1 Alternative 2 Borrow $5 milllion Issue 100,000 shares at 6% of stock Less: Less: Requirement 2. Complete the memo to Patterson's management discussing the advantages and disadvantages of borrowing and of issuing common stock to raise the needed cash. Which method of raising funds would you recommend? To: Management of Patterson Medical Goods Subject: Advantages and disadvantages of borrowing versus issuing stock to raise cash for expansion The advantages and disadvantages of borrowing to raise cash for expansion are as follows: (If a box is not used in the table, leave the box empty; do not select a label.) Advantages Disadvantages The advantages and disadvantages of issuing stock to raise cash for expansion are as follows: (If a box is not used in the table, leave the box empty; do not select a label.) Advantages Disadvantages The method of raising funds that I would recommend depends upon the goal of the company in relation to this plan. to raise cash for expansion. If the company is looking for If the company is looking to select an expansion plan that results in a higher earnings per share I would recommend a "safe" means of raising cash I would recommend * More Info * Requirements The board of directors is considering obtaining the $5 million either by borrowing at 6% or by issuing an additional 100,000 shares of common stock. This year the company has earned $3 million before interest and taxes and has 100,000 shares of $i-par common stock outstanding. The market price of the company's stock is $50.00 per share. Assume that income before interest and taxes is expected to grow by 10% each year for the next two years. The company's marginal income tax rate is 30%. 1. Evaluate the effect the two financing alternatives will have on Patterson's net income and earnings per share two years from now. 2. Complete the memo to Patterson's management discussing the advantages and disadvantages of borrowing and of issuing common stock to raise the needed cash. Which method of raising the funds would you recommend? Print Done Print Done