Question
You are the sole founder and owner of a company MyOwnDoing Corporation - that is the fourth company to get tourists into space after SpaceX,
You are the sole founder and owner of a company MyOwnDoing Corporation - that is the fourth company to get tourists into space after SpaceX, Blue Origin, and Virgin Galactic. You are the single shareholder (you won 100.00% of the company). Below is the current equity section of MyOwnDoing Corporation.
Common Stock - $1.00 par value, 10m million shares authorized, 100,000 shares issued and outstanding | $100,000 |
Paid-in capital in excess of par value | 3,900,000 |
Retained Earnings (Deficit) | (1,720,000) |
Total Shareholders Equity | $2,280,000 |
The space tourism business is booming and you need extra capital of $100,000,000 to finance rapid expansion. You have two options: either issue stock or bonds. Since you do not have any significant personal cash available, all new shares would be issued to new shareholders. You will issue 400,000 new shares each for $250 (ignore stock issuance costs). If you issue bonds, you will issue 100,000 10% 10-year bonds at par value (each bond has a par value of $1,000) that pay interest annually. You project that the Earnings Before Interest and Taxes (EBIT) if you expand will amount to $25,000,000 each year for the next 10 years. The corporate tax rate is 22.00%.
Part A: Complete the table below to calculate the simplified annual Return on Contributed Equity (ROE) of each of the two options. The ROE must be expressed as a percentage to 2 decimal places; for example, 23.74%
| OPTION 1: ISSUE NEW SHARES | OPTION2: ISSUE BONDS |
Earnings Before Interest & Taxes (EBIT) | $25,000,000 | $25,000,000 |
Interest Expense |
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Earnings Before Taxes (EBT) |
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Tax Expense (22.00% * EBT) |
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Earnings After Taxes (EAT) or Net Income |
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Total Contributed Equity (Old Equity + New Equity) |
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Return on Contributed Equity (EAT / Total Contributed Equity) % |
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Part B: Complete the table below to calculate the ownership after raising the new capital under each of the two options.
| OPTION 1: ISSUE NEW SHARES | OPTION2: ISSUE BONDS |
BEFORE RAISING NEW CAPITAL |
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Shares owned by founder | 100,000 | 100,000 |
Total shares in the company | 100,000 | 100,000 |
Founder Ownership percentage | 100.00% | 100.00% |
AFTER RAISING NEW CAPITAL |
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Shares owned by founder |
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Total shares in the company (Old + New) |
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Founder Ownership percentage |
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Part C:Go to the Table you completed under (1) above. Which option would you prefer and why? EXPLAIN (80 to 100 words)
Part D: Go to the Table you completed under (2) above. Which option would you prefer and why? EXPLAIN (80 to 100 words)
Part E: Make any final comments (about two short sentences) (45 to 60 words)
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