In: Finance
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.
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 |