close solutoin list

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.]

BuyFind

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

Solutions

Chapter
Section
Chapter 13, Problem 13P
Textbook Problem

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)

Chapter 13, Problem 13P, FINANCING ALTERNATIVES The Severn Company plans to raise a net amount of 270 million to finance new

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 σeps 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.]

Expert Solution

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

See Solution

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Chapter 13 Solutions

Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Show all chapter solutions

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions
How do non-operating assets impact a firms valuation using the corporate valuation model?

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

In your own words, define a joint venture and a syndicate.

Foundations of Business (MindTap Course List)

Why is productivity important?

Principles of Economics (MindTap Course List)

If a companys board of directors wants management to maximize shareholder wealth, should the CEOs compensation ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)