Question 2. (20 points) Kemper 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 55% percent of the 1,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 30 percent. Balance sheet information is shown below.

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 bond carrying 50 warrants to buy common stock at $15 per share.

a. Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of the warrants.

b. Calculate the president's ownership position for both alternatives. He doesn't buy any of the additional shares.

c. Calculate earnings per share for both alternatives, assuming that EBIT is 12% of total assets.

d. Calculate the debt ratio under both alternatives

e. Which alternative do you recommend and why?

Current Balance Sheet Current Liabilities Common Stock, Par $1 Retained earnings Total claims $900,000 1,000,000 700,000 $2,600,000 Total Assets $2,600,000 $10 200,000 $1 30% $2,000,000 $600,000 10% $60,000 $200,000 Alternative 1: Common stock # new shares Par value per share Tax rate New financing Existing Loan Interest rate Interest amount old Interest amount new Alternative 2: Debentures Exercise price per warrant # bonds to raise 2M # new shares warrants per bond New money raised Addition to par Additional paid-in capital 8% $15 2,000 100,000 50 1,500,000 100,000 1,400,000 President owns 55.0% Shares outstanding 1,000,000