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In: Finance

5. Anthony Manufacturing plans to raise $100 million through a new securities issue. It is considering...

5. Anthony Manufacturing plans to raise $100 million through a new securities issue. It is considering issuing either common stock or debt. Anthony’s common stock is currently trading at $50 per share; it has $1 billion of assets, $500 million of debt, and $500 million of common stock outstanding; its EBIT is $80 million; and its income tax rate is 40%. The interest rate on its debt is 6%, and new debt would also require a 6% interest rate.

a. Show the pro forma impact of a $100 million common stock issue on Anthony’s balance sheet, interest coverage, and earnings per share.

b. Show the pro forma impact of a $100 million debt issue on Anthony’s balance sheet, interest coverage, and earnings per share.

Solutions

Expert Solution

Anthony Manufacturing Amt $ Million
Capital raining Plan Current Status New Stock Issue New Debt Issue
Common stock Amount                                500                              600                            500
Market Price per share                                  50                                50                              50
a No of Common stock outstanding in Millions                                  10                                12                              10
Debt Amount                                500                              500                            600
Interest expense @6%                                    30                                30                              36
Change in Blanace sheet Amount of Common Stock after new capital issue                                   -                                100                               -   Ans a
Change in Blanace sheet Amount of Debt after new capital issue                                   -                                   -                              100 Ans b
b EBIT                             80.00                           80.00                         80.00
c Interest Expense                               30.00                           30.00                         36.00
EBT                             50.00                           50.00                         44.00
Tax @40%                            20.00                          20.00                        17.60
d Net Income                               30.00                           30.00                         26.40
e EPS =d/a $                           3.00 $                         2.50 $                       2.64
f Interest Coverage =EBIT /Interest Expense =b/c                               2.67                             2.67                           2.22
EPS Change with Common Stock issue   $                       (0.50) Ans a
Interest Coverage change with Common stock issue   0 Ans a
EPS Change with Debt Issue $                     (0.36) Ans b
Interest Coverage change with debt issue                           (0.44) Ans b

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