FINANCING ALTERNATIVES The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2019. Two alternatives are being considered: Common stock may be sold to not $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, 2018
(millions of dollars)
The Severn Company: Income Statement for Year Ended
December 31,2018 (millions of dollars)
Sales | $2,475.00 |
Operating costs | 2227.50 |
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:
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.)
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Financial & Managerial Accounting
Accounting Information Systems
Corporate Financial Accounting
Principles of Macroeconomics (MindTap Course List)
Cornerstones of Financial Accounting
Principles of Economics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
STATISTICS F/BUSINESS+ECONOMICS-TEXT
Probability and Statistics for Engineering and the Sciences
Principles of Microeconomics (MindTap Course List)
ECON: MICRO4 (New, Engaging Titles from 4LTR Press)
Foundations of Business (MindTap Course List)
Essentials of Business Communication (MindTap Course List)
Financial And Managerial Accounting
Essentials of Economics (MindTap Course List)
College Accounting, Chapters 1-27
Management, Loose-Leaf Version
Financial Accounting
Intermediate Accounting: Reporting And Analysis
Contemporary Marketing
Managerial Accounting: The Cornerstone of Business Decision-Making
College Accounting (Book Only): A Career Approach
Accounting Information Systems
MKTG 12:STUDENT ED.-TEXT
Fundamentals of Financial Management (MindTap Course List)
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
College Accounting (Book Only): A Career Approach
Financial & Managerial Accounting
Financial Accounting
Accounting (Text Only)
Statistics for Business & Economics, Revised (MindTap Course List)
Exploring Economics
Pkg Acc Infor Systems MS VISIO CD
College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
Principles of Macroeconomics (MindTap Course List)
Corporate Financial Accounting
Economics (MindTap Course List)
Cornerstones of Cost Management (Cornerstones Series)
Microeconomics
Economics For Today
Macroeconomics
PAYROLL ACCT.,2019 ED.(LL)-TEXT
Survey of Accounting (Accounting I)
Practical Management Science
Purchasing and Supply Chain Management
Understanding Management (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
Micro Economics For Today
Macroeconomics: Private and Public Choice (MindTap Course List)
Managerial Accounting
Microeconomics: Private and Public Choice (MindTap Course List)
Principles of Microeconomics
MACROECONOMICS FOR TODAY