Question

In: Accounting

Perform an EPS/EBIT Analysis for the Hershey Company Problem Statement: Hershey needs to raise $1Bn to...

Perform an EPS/EBIT Analysis for the Hershey Company

Problem Statement:

Hershey needs to raise $1Bn to build four new manufacturing plants outside the United States to implement their strategic plan. The Board of Directors and Executive Leadership team are evaluating how best to raise this capital. Complete an analysis to determine the best solution.

Currently, Hershey has the following input for the analysis:

Interest Rate: 3%

Tax Rate: 34%

Stock Price (January 2015) $106

# of Shares Outstanding: 220Mn

EBIT in 2014 was $1.3Bn so evaluate options based on $1.0Bn and $2.0Bn. For the evaluation, they will consider 100% stock, 100% debt and 50/50 combination.

Prepare an EPS/EBIT analysis for Hershey using the above information.

What recommendation would you give the Board on the source of the capital required?

100% Common Stock Financing
	Recession	Normal	Boom
EBIT
Interest
EBT
Taxes
EAT
# Shares
EPS

100% Debt Financing
	Recession	Normal	Boom
EBIT
Interest
EBT
Taxes
EAT
# Shares
EPS

50% Stock / 50% Debt Financing
	Recession	Normal	Boom
EBIT
Interest
EBT
Taxes
EAT
# Shares
EPS

What recommendation would you give the Board for financing this project?

Expert Solution

1 .100% common stock financing

Particulars	Recession	normal	boom
EBIT	1,000,000,000	1,300,000,000	2,000,000,000
Interest	0	0	0
EBT	1,000,000,000	1,300,000,000	2,000,000,000
Taxes lh	340,000,000	442,000,000	680,000,000
EAT	660,000,000	858,000,000	1,320,000,000
# shares	229,433,962{220,000,000+(1,000,000,000/106)}	229,443,962	229,443,962
EpS	2.88	3.74	5.75

2 . 100% debt financing

Particulars	Recession	normal	boom
EBIT	1,000,000,000	1,300,000,000	2,000,000,000
Interest	30,000,000 (1,000,000,000x3%)	30,000,000	30,000,000
EBT	970,000,000	1,270,000,000	1,970,000,000
Taxes	329,800,000	431,800,000	669,800,000
EAT	640,200,000	838,200,000	1,300,200,000
# shares	220,000,000	220,000,000	220,000,000
EPS	2.91	3.80	5.91

3 . 50% stock financing /50% debt financing

Particulars	Recession	normal	boom
EBIT	1,000,000,000	1,300,000,000	2,000,000,000
Interest	15,000,000	15,000,000	15,000,000
EBT	985,000,000	1,285,000,000	1,985,000,000
Taxes	334,900,000	436,900,000	674,900,000
EAT	650,100,000	848,100,000	1,310,100,000
# shares	224,716,981 {220,000,000+500,000,000/106}	224,716,981	224716981
EPS	2.89	3.77	5.83

ekkarill92 answered 2 years ago

Perform an EPS/EBIT Analysis for Hershey. Read the information on pages 255 - 258 of the...

Perform an EPS/EBIT Analysis for Hershey. Read the information on pages 255 - 258 of the text. Following the example on page 257, Table 8-5, perform an EPS/EBIT analysis for Hershey. Use the following information for your analysis. Hershey’smanagement wants to raise $1 billion to expand globally. Determine whether Hershey should use all debt, all stock, or a 50 percent stock/50 percent debt combinationto finance this market-development strategy. Assume a38 percent corporate tax rate. Assume PepsiCo’sinterest rateto borrow long-term debt is...

Based on the following set of information, do an EPS-EBIT analysis There is 100% debt, 70%...

Based on the following set of information, do an EPS-EBIT analysis There is 100% debt, 70% debt and 30% equity, 50% debt and 50% equity, 30% debt and 70% equity, and 100% equity. The amount of capital needed is $100 million. The estimated range is low: $20 million, middle: $30 million, high $40 million. IR= 5% Tax rate= 30% Stock price= $50 # of shares outstanding= 500 million

(EBIT-EPS analysis) Bill and Kate Theil are not only husband and wife but entrepreneurs who have...

(EBIT-EPS analysis) Bill and Kate Theil are not only husband and wife but entrepreneurs who have established three successful businesses. The proposed plan for their latest effort involves a series of international retail outlets to distribute and service a full line of ingenious home garden tools. The stores would be located in high-traffic cities in Latin America such as Panama City, Bogotá, São Paulo, and Buenos Aires. The entrepreneurs have proposed two financing plans. Plan A is an all common-equity...

(EBIT-EPS analysis) A group of retired college professors has decided to form a small manufacturing corporation....

(EBIT-EPS analysis) A group of retired college professors has decided to form a small manufacturing corporation. The company will produce a full line of traditional office furniture. The investors have proposed two financing plans. Plan A is an all-common-equity alternative. Under this agreement, 1.2 million common shares will be sold to net the firm $ 10 per share. Plan B involves the use of financial leverage. A debt issue with a 20-year maturity period will be privately placed. The debt...

EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of...

EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed: bullet Plan A is an all-common-equity structure in which $2.5 million dollars would...

(EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of...

(EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed: • Plan A is an all-common-equity structure in which $ 2.3 million dollars...

What is Earnings Before Interest and Taxes-Earnings Per Share (EBIT-EPS) analysis? What is the indifference curve?...

What is Earnings Before Interest and Taxes-Earnings Per Share (EBIT-EPS) analysis? What is the indifference curve? How is risk factored into the EBIT-EPS analysis? What are basic shortcomings of EBIT's analyses?

(Related to Checkpoint 15.2) (EBIT-EPS analysis) Abe Forrester and three of his friends from college have...

(Related to Checkpoint 15.2) (EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed: Plan A is an all-common-equity structure in which $2.2...

Mahomes Company needs to raise $275 million to start a new project and will raise the...

Mahomes Company needs to raise $275 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 6 percent, for new preferred stock, 4 percent, and for new debt, 2 percent. What is the true initial cost...

Cully Company needs to raise $23 million to start a new project and will raise the...

Cully Company needs to raise $23 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 8 percent, for new preferred stock, 6 percent, and for new debt, 4 percent. What is the true initial cost...