Question

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 5%.
• The price per share of Hershey’s stock is $25 per share.
• Use the following EBIT ranges
  • Recession -- $100 million
  • Normal -- $500 million
  • Boom -- $1 billion
• A total of 60 million shares of common stock are outstanding.

After you have calculated the EPS under each economic scenario for each of the financing options, discuss which financing option is most attractive, and whythat option is the most attractive.

Strategic Management: Concepts and Cases,16th Edition, by Fred R. David, Prentice Hall,

2017, ISBN 978- 0-13-416784-8

Answer 1

	ALL DEBT FINANCING OPTION
	Number of share outstanding before Financing	60	million
	Number of share outstanding after Financing	60	million
		A	B	C=B*0.05	D=A-C	E=D*0.38	F=D-E	G=F/60
	Economic Scenario	EBIT($million)	Amount Borrowed($ million)	Interest expense($million)	EBT($ million)	Tax Expense($ million)	Net Income($ million)	EPS (Earning Per share)
	Recession	$100	$1,000	$50.00	$50.00	$19.00	$31.00	$0.52
	Normal	$500	$1,000	$50.00	$450.00	$171.00	$279.00	$4.65
	boom	$1,000	$1,000	$50.00	$950.00	$361.00	$589.00	$9.82
	50% STOCKAND 50% DEBT FINANCING OPTION
	Number of share outstanding before Financing	60	million
	Amount of common shares issued	$500	million	(0.5*1000)
	Number of share issued for Financing	20	million	(500/25)million
	Number of share outstanding after Financing	80	million
		A	B	C=B*0.05	D=A-C	E=D*0.38	F=D-E	G=F/80
	Economic Scenario	EBIT($million)	Amount Borrowed($ million)	Interest expense($million)	EBT($ million)	Tax Expense($ million)	Net Income($ million)	EPS (Earning Per share)
	Recession	$100	$500	$25.00	$75.00	$28.50	$46.50	$0.58
	Normal	$500	$500	$25.00	$475.00	$180.50	$294.50	$3.68
	boom	$1,000	$500	$25.00	$975.00	$370.50	$604.50	$7.56
	ALL STOCK FINANCING OPTION
	Number of share outstanding before Financing	60	million
	Amount of common shares issued	$1,000	million
	Number of share issued for Financing	40	million	(1000/25)million
	Number of share outstanding after Financing	100	million
		A	B	C=B*0.05	D=A-C	E=D*0.38	F=D-E	G=F/100
	Economic Scenario	EBIT($million)	Amount Borrowed($ million)	Interest expense($million)	EBT($ million)	Tax Expense($ million)	Net Income($ million)	EPS (Earning Per share)
	Recession	$100	$0	$0.00	$100.00	$38.00	$62.00	$0.62
	Normal	$500	$0	$0.00	$500.00	$190.00	$310.00	$3.10
	boom	$1,000	$0	$0.00	$1,000.00	$380.00	$620.00	$6.20
		EARNING PER SHARE (EPS)
	Economic Scenario	All Debt	50% Stock, 50% Debt	All Stock
	Recession	$0.52	$0.58	$0.62
	Normal	$4.65	$3.68	$3.10
	boom	$9.82	$7.56	$6.20
	Economic Scenario	Best Option	(Based on EPS)
	Recession	AllStock
	Normal	All Debt
	boom	AllDebt