The Savannah Company has 10,000 shares of common stock outstanding with a par va

Question

The Savannah Company has 10,000 shares of common stock outstanding with a par value of $40, and its tax rate is 48%. The Savannah Company is weighing the choice among three financing alternatives for a major expansion program which would require $100,000 and increase its operating profit from $90,000 to $125,000. The financing alternative to raise the needed $100,000 are as follows:

(A)2,000 common shares at $50 net to the company.

(B)$100,000 of 7% preferred stock.

(C)$100,000 of 6% bonds.

Assuming an EBIT of $125,000 for each alternative, determine the EPS for each financing plan.

Explanation / Answer

Existing No. of Common Stock=10000

New Common Stock to be issued=2000

Total No. of Common Stock under Alternate (A)=12000 Shares

Alternate A B C EBIT $125,000.00 $125,000.00 $125,000.00 Less: Interest $0.00 $0.00 $6,000.00 EBT $125,000.00 $125,000.00 $119,000.00 Less: Tax @48% $60,000.00 $60,000.00 $57,120.00 EAT $65,000.00 $65,000.00 $61,880.00 Less: Pref. Dividend $0.00 $7,000.00 $0.00 Earning for ESH $65,000.00 $58,000.00 $61,880.00 No. of Shares 12000 10000 10000 EPS=Earning/No. of Share $5.42 $5.80 $6.19

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