Question
Your firm has the following financing outstanding. Debt: 50,000 units of 8%, 25-year bonds at a net price of $1198.00. Preferred Stock: 120,000 shares of
Your firm has the following financing outstanding.
Debt: 50,000 units of 8%, 25-year bonds at a net price of $1198.00.
Preferred Stock: 120,000 shares of 8.5%, $100 preferred stock at a net issue price of $112.
Common Stock: 2,000,000 shares of common stock with a Beta of 1.1 and a net price of $65.
Retained Earnings: $96,660,000.
Market: tax rate = 40%, MRP (market risk premium) = 9%, Rf (risk free rate) = 3.1%.
If the firm should decide to finance the $120 million expansion with external funds, demonstrate the effect on EPS of 100% debt versus 100% equity financing. Use a before tax cost of 8% on the new debt financing. Given an EBIT most likely equal to $30 million, expected Preferred Dividends of $1 million, and an existing debt interest expense of $4 million. The common stock price will fall to $60 if new common stock is issued. [Round amounts to nearest million.]
| 100% Debt (5 points) | 100% Equity (5 points) | |
| EBIT | ||
| Interest (existing) | ||
| Interest (forecasted for new financing) | ||
| EBT | ||
| Tax (40%) | ||
| EAT | ||
| Preferred Dividends | ||
| EACSH | ||
| (Divide by) NSHOUT | ||
| EPS | ||
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