Question

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?

Answer 1

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