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Excel File Edit View Insert Format Tools Data Window Help AutoSave OFF F1-F Home Insert Draw Page Layout Formulas Data Review View Calibri (Body) 11 A A 2. Wrap Text v Paste B T A . ilil Merge & Center 024 Xfx F D E 6 Question 2. (20 points) Reuth Corporation plans to raise $2 million to pay off its existing short-term bank loan of $600,000 and to Increase total assets by $1,400,000. The bank loan bears an interest rate of 10 percent. The company's president owns 51.5% 7 percent of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 20 percent. Balance sheet Information is shown below. 8 9 The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 band carrying 50 warrants to buy common stock at $15 per share. 10 11 12 Current Balance Sheet 13 Current Liabilities $900,000 14 Common Stock, Par $0.25 1,000,000 15 Retained earnings 700,000 16 Total Arts $2,600,000 Total claims $2,600,000 17 18 Ahernative 1: Common stock $10 FACTS Alternative 1: Common stock 19 new shares 200,000 Tax rate 20% new shares 20 Par value per share $0.25 New financing $2,000,000 Par value per share 21 Existing loan $600,000 22 Ahernative 2. Debentures Interest rate 10% Alternative 2: Debentures 23 Exercise priceper warrant $15 Interest amount-old $60,000 Exercise priceper warrant 24 bonds to raise w capital 2,000 Interest amount-new $200,000 bands to raise 2M 25 new shares 100,000 new shares 26 warrants per bond 50 President owns 51.5warrants per bond 27 New money raised 1,500,000 Shares outstanding 4,000,000 New money raised 28 Addition to par 25,000 Addition to par 29 Additional paid in capital 1,475,000 Additional paid in capital 30 31 Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of the warrants 32 b. Calculate the president's ownership position for both alternatives. He doesn't buy any of the additional shares 33 Calculate earnings per share for both hernatives, assuming that EBIT is 11% of total assets. 34 d. Calculate the debt ratio under both alternatives 35 6. Whichternative do you recommend and why? 01 Q2 Q3 Q4 05 06 + Excel File Edit View Insert Format Tools Data Window Help AutoSave OFF F1-F Home Insert Draw Page Layout Formulas Data Review View Calibri (Body) 11 A A 2. Wrap Text v Paste B T A . ilil Merge & Center 024 Xfx F D E 6 Question 2. (20 points) Reuth Corporation plans to raise $2 million to pay off its existing short-term bank loan of $600,000 and to Increase total assets by $1,400,000. The bank loan bears an interest rate of 10 percent. The company's president owns 51.5% 7 percent of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 20 percent. Balance sheet Information is shown below. 8 9 The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 band carrying 50 warrants to buy common stock at $15 per share. 10 11 12 Current Balance Sheet 13 Current Liabilities $900,000 14 Common Stock, Par $0.25 1,000,000 15 Retained earnings 700,000 16 Total Arts $2,600,000 Total claims $2,600,000 17 18 Ahernative 1: Common stock $10 FACTS Alternative 1: Common stock 19 new shares 200,000 Tax rate 20% new shares 20 Par value per share $0.25 New financing $2,000,000 Par value per share 21 Existing loan $600,000 22 Ahernative 2. Debentures Interest rate 10% Alternative 2: Debentures 23 Exercise priceper warrant $15 Interest amount-old $60,000 Exercise priceper warrant 24 bonds to raise w capital 2,000 Interest amount-new $200,000 bands to raise 2M 25 new shares 100,000 new shares 26 warrants per bond 50 President owns 51.5warrants per bond 27 New money raised 1,500,000 Shares outstanding 4,000,000 New money raised 28 Addition to par 25,000 Addition to par 29 Additional paid in capital 1,475,000 Additional paid in capital 30 31 Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of the warrants 32 b. Calculate the president's ownership position for both alternatives. He doesn't buy any of the additional shares 33 Calculate earnings per share for both hernatives, assuming that EBIT is 11% of total assets. 34 d. Calculate the debt ratio under both alternatives 35 6. Whichternative do you recommend and why? 01 Q2 Q3 Q4 05 06 +