Question

CFO of Graham Del plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. What affect it can have on the company’s financial statements. Discuss.

Answer 1

The income statement is shown as

Sales
COGS
Gross Profit
SG&A
EBITDA
D&A
EBIT
Interest expense
EBT
Tax
PAT

Thus here if the company issues $500 million of new common stock and use the proceeds to pay outstanding bonds i.e. the interest expense will reduce. Thus EBT will be more. Since tax rate is constant therefore Net Profit will be more. However since the number of shares have increased thus the earnings per share of the company will be less as the said profit will now can be said to be available to a larger shareholder base.

There would be a decrease in the bond liability. Also there would be an addition in the shareholder equity. Thus this would in effect net off on the balance sheet.

There would be a positive impact on the cash flow as the net income is more. However this would be a one time thing as it would only be when the company would receive the $500 million from the new common stock issue.