Compute the approximate market price of the common stock if the P/E ratio remains at 10 if new stock is issued but falls to 9.5 if the money is borrowed.
Options to financing a business expansion.
A Corporation is planning to expand the business and needs
$30,000,000. The company believes that a 12-year term loan can be
negotiated with a bank at an annual rate of 10%. Alternatively, an
investment banking firm has indicated that it is willing to
underwrite a common stock issue for a spread of 5%. The corporation
currently has 2,000,000 common shares outstanding.
(a) If new shares of the corporation’s stock can be sold for $30
per share, how many shares of stock must be sold to net the
$30,000,000 that Wheeler needs, assuming out-of-pocket expenses of
$600,000?
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Order Paper Now(b) If the corporation’s earnings before interest and taxes
increase to $10,000,000 and the applicable tax rate is 34%, what
would the earnings per share be under each financing alternative?
(Assume annual interest before financing of $1,000,000)
(c) Compute the approximate market price of the common stock if the
P/E ratio remains at 10 if new stock is issued but falls to 9.5 if
the money is borrowed.
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