Capital Structure Problem The Ashley Company currently has 1,000,000 shares of c

Question

Capital Structure Problem

The Ashley Company currently has 1,000,000 shares of common stock outstanding with a market price of $27.00 per share. It also has $25,000,000 outstanding in 5.75% 20 year bonds. The company is considering a $20,000,000 expansion program that it can finance with:

Plan A) All common stock at the net proceeds of $25.00 per share for 80,000 new shares.

Plan B) All bonds at 7.25% for 30 years with net proceeds of $20,000,000 for $22,000,000 of new debt.

Plan C) Half common stock at net proceeds of $25.00 per share for 40,000 new shares and half bonds at 6.75% for 30 years with net proceeds of $10,000,000 for $11,000,000 of new debt.

The best estimate available for the company's EBIT after the expansion is .5 probability of $4,000,000, and a .3 probability of $5,000,000 and a .2 probability of $6,000,000. The corporation's tax rate is 35%.

>[QUESTIONS]<

What is the expected EBIT after the expansion? ________

What is the total annual bond interest expense after the expansion for each plan? A)_______ B)_______ C)_______

What is the expected EPS for each financing option?
Plan A EPS ________ Plan B EPS_________ Plan C EPS_________

Which financing plan do you recommend?

Explanation / Answer

Plan A Plan B Plan c answer to 1 EBIT 4700000 4700000 4700000 answer to 2 interest 0 3032500 2180000 plan B 1437500 plan b 1595000 total interest 3032500 earning after interest 4700000 1667500 2520000 plan c 742500 tax 35% 1645000 583625 882000 plan c 1437500 earning after tax 3055000 1083875 1638000 total interest 2180000 no of shares 1800000 1000000 1400000 EPS 1.697222 1.083875 1.17 I WOULD RECOMMOND FINANCING FROM PLAN a BECAUSE IT IS HAVING HIGHEST EPS

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