Question
You are CEO of a high-growth technology firm.You plan to raise $150 million to fund a planned expansion by issuing either new shares or new
You are CEO of a high-growth technology firm.You plan to raise $150 million to fund a planned expansion by issuing either new shares or new debt. With the expansion, you expect earnings next year of $31 million. The firm currently has 13 million shares outstanding, with a price of $99 per share. Assume perfect capital markets.
a. If you raise the $150 million by selling new shares, what will the forecast for next year's earnings per share be? (Nearest cent)
b. If you raise the $150 million by issuing new debt with an interest rate of 6%, what will the forecast for next year's earnings per share be? (Nearest cent)
c. What is the firm's forward P/E ratio (that is, the share price divided by the expected earnings for the coming year) if it issues equity? What is the firm's forward P/E ratio if it issues debt? How can you explain the difference? (Round to nearest integer)
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