Would you asnwer the last two questions Thanks! The Howland Carpet Company has grown rapidly during the past 5 years. Recently, 1scommercial bank urged the company to consider increasing its permanent financing. 1tsbank loan under a line of credit has risen to $250,000, carrying an 8% interest rate.Howland has been 30 to 60 days late in paying trade creditors.Discussions with an investment banker have resulted in the decision to raise $500,000at this time. Investment bankers have assured the firm that the following alternatives arefeasible (flotation costs will be ignored).Alternative 1: Sell common stock at $8.Alternative 2: Sell convertible bonds at an 8% coupon, convertible into 100 shares ofcommon stock for each $1,000 bond (i.e., the conversion price is $10 per share).Alternative 3: Sell debentures at an 8% coupon, each $1,000 bondcarrying100warrants to buy common stock at $10. John L. Howland, the president, owns 80% of the common stock and wishes to maintaincontrol of the company. There are 100,000 shares outstanding. The following are extractsof Howland's latest financial statements:Balance SheetCurrent liabilities$400,000100,000Common stock, par $1Retained earnings50,000Total assets$550,000Total claims$550,000Income StatementSales$1,100,000All costs except interest990,000EBIT$ 110,000Interest20,000Pre-tax earnings2$90,00036,0002$Taxes (40%)Net income54,000Shares outstanding100,000Earnings per sharePrice/earnings ratioMarket price of stock240.5415.838.55a. Show the new balance sheet under each alternative. For Alternatives 2 and 3, showthe balance sheet after conversion of the bonds or exercise of the warrants. Assumethat half of the funds raised will be used to pay off the bank loan and half to increasetotal assets.b. Show Mr. Howland's control position under each alternative, assuming that he doesnot purchase additional shares.c. What is the effect on earnings per share of each alternative, assuming that profitsbefore interest and taxes will be 20% of total assets?d. What will be the debt ratio (TL/TA) under each alternative?e. Which of the three alternatives would you recommend to Howland, and why?

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The Howland Carpet Company has grown rapidly during the past 5 years. Recently, 5 commercial bank urged the company to consider increasing its permanent financing. Rs bank loan under a line of credit has risen to $250,000, carrying an 8% interest rate. Howland has been 30 to 60 days late in paying trade creditors. Discussions with an investment banker have resulted in the decision to raise $500,000 at this time. Investment bankers have assured the firm that the following alternatives are feasible (flotation costs will be ignored). Alternative 1: Sell common stock at $8. • Alternative 2: Sell convertible bonds at an 8% coupon, convertible into 100 shares of common stock for each $1,000 bond (i.e., the conversion price is $10 per share). Alternative 3: Sell debentures at an 8% coupon, each $1,000 bond carrying 100 warrants to buy common stock at $10.

The Howland Carpet Company has grown rapidly during the past 5 years. Recently, 5 commercial bank urged the company to consider increasing its permanent financing. Rs bank loan under a line of credit has risen to $250,000, carrying an 8% interest rate. Howland has been 30 to 60 days late in paying trade creditors. Discussions with an investment banker have resulted in the decision to raise $500,000 at this time. Investment bankers have assured the firm that the following alternatives are feasible (flotation costs will be ignored). Alternative 1: Sell common stock at $8. • Alternative 2: Sell convertible bonds at an 8% coupon, convertible into 100 shares of common stock for each $1,000 bond (i.e., the conversion price is $10 per share). Alternative 3: Sell debentures at an 8% coupon, each $1,000 bond carrying 100 warrants to buy common stock at $10.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 14P

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The Howland Carpet Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of credit has risen to $250,000, carrying an 8% interest rate. Howland has been 30 to 60 days late in paying trade creditors. Discussions with an investment banker have resulted in the decision to raise $500,000 at this time. Investment bankers have assured the firm that the following alternatives are feasible (flotation costs will be ignored). ● Alternative 1: Sell common stock at $8. ● Alternative 2: Sell convertible bonds at an 8% coupon, convertible into 100 shares of common stock for each $1,000 bond (i.e., the conversion price is $10 per share). ● Alternative 3: Sell debentures at an 8% coupon, each $1,000 bond carrying 100 warrants to buy common stock at $10. John L. Howland, the president, owns 80% of the common stock and wishes to maintain control of the company. There are 100,000 shares…
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