# FINANCING ALTERNATIVES The Severn Company plans to raise a net amount of \$270 million to finance new equipment in early 2017. Two alternatives are being considered: Common stock may be sold to net \$60 per share, or bonds yielding 12% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows: The Severn Company: Balance Sheet as of December 31, 2016 (Millions of Dollars) The Severn Company: Income Statement for Year Ended December 31, 2016 (Millions of Dollars) Sales \$2,475.00 Operating costs 2,227.50 Earnings before interest and taxes (10%) \$ 247.50 Interest on short-term debt 15.00 Interest on long-term debt 69.75 Earnings before taxes \$ 162.75 Federal-plus-state taxes (40%) 65.10 Net income \$ 97.65 The probability distribution for annual sales is as follows: The probability distribution for annual sales is as follows: Probability Annual Sales (Millions of Dollars) 0.30 \$2,250 0.40 2,700 0.30 3,150 Assuming that EBIT equals 10% of sales, calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible sales level. Then calculate expected EPS and σ eps under both debt and stock financing alternatives. Also calculate the debt-to-capital ratio and the times-interest-earned (TIE) ratio at the expected sales level under each alternative. The old debt will remain outstanding. Which financing method do you recommend? (Hint: Notes payable should be included in both the numerator and the denominator of the debt-to-capital ratio.]

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### Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781305635937
BuyFind

### Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781305635937

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