Question 4 (20 marks) The Adam Sports Company plans to raise a net amount of $200 million to finance new equipment in early 2020. Two alternatives are being considered: Common stock may be sold to net $50 per share, or bonds yielding 12% may be issued. The balance sheet and income statement of the company prior to financing are as follows: The Adam Sports Company: Balance Sheet as of December 31, 2019 (Millions of Dollars) Current assets Net fixed assets $500.00 900.00 Short-term debt Long-term debt Common stock, $3 par Retained earnings Total liabilities and equity $250.00 700.00 60.00 390.00 $1,400.00 Total assets $1,400.00 The Adam Sports Company: Income Statement for Year Ended December 31, 2019 (Millions of Dollars) Sales Operating costs (90% of sales) Earnings before interest and taxes Interest on short-term debt Interest on long-term debt Earnings before taxes Taxes (20%) Net Income $2,475.00 2,227.50 $247.50 15.00 70.00 $162.50 32.50 $130.00 The annual sales after expansion is expected to have 70% chance to increase to $3,200 million and 30% chance to decrease to $2,000 million. Assume the operating costs are all variable and equals 90% of sales and the old debt will remain outstanding. Required: a. Calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible sales level. (8 marks) Question 4 (20 marks) The Adam Sports Company plans to raise a net amount of $200 million to finance new equipment in early 2020. Two alternatives are being considered: Common stock may be sold to net $50 per share, or bonds yielding 12% may be issued. The balance sheet and income statement of the company prior to financing are as follows: The Adam Sports Company: Balance Sheet as of December 31, 2019 (Millions of Dollars) Current assets Net fixed assets $500.00 900.00 Short-term debt Long-term debt Common stock, $3 par Retained earnings Total liabilities and equity $250.00 700.00 60.00 390.00 $1,400.00 Total assets $1,400.00 The Adam Sports Company: Income Statement for Year Ended December 31, 2019 (Millions of Dollars) Sales Operating costs (90% of sales) Earnings before interest and taxes Interest on short-term debt Interest on long-term debt Earnings before taxes Taxes (20%) Net Income $2,475.00 2,227.50 $247.50 15.00 70.00 $162.50 32.50 $130.00 The annual sales after expansion is expected to have 70% chance to increase to $3,200 million and 30% chance to decrease to $2,000 million. Assume the operating costs are all variable and equals 90% of sales and the old debt will remain outstanding. Required: a. Calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible sales level. (8 marks)