Question
In: Finance
1) HSB Co. manufactures construction materials and has decided to expand operations. The new operation...
1) HSB Co.
manufactures construction materials and has decided to expand
operations.
The new operation is expected to increase
EBIT from the current level of $750 000
to $1 million per annum. HSB Co. has a
capital structure that utilizes bonds,
ordinary equity and preference shares. The
$500 000 of issued bonds pay 7% per
annum. Preference shares pay an annual
fixed dividend of $75 000. The company
has 1 000 000 ordinary shares that are
trading at $5 per share. Corporate tax rate is
18.5%.
a) HSB Co needs to
raise $800 000 to fund the expansion. Assuming the company
can issue new shares at the current
market price, what is the impact on EPS if new
shares are issued to fund the
expansion?
b) If new debt can
be raised at 9% interest rate, what is the impact on EPS of
using
debt rather than a new equity
issue?
c) Calculate the EPS indifference point of New Equity plan and New Debt Plan.
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Austec Ltd manufactures garden tools and has decided to expand operations. The new operations are expected...
Austec Ltd manufactures garden tools and has decided to expand
operations. The new
operations are expected to increase EBIT from the current level of
$500 000 to $1 million p.a.
Austec has a capital structure that utilises bonds, ordinary equity
and preference shares. The
$500 000 of issued bonds pay 6% p.a.. Preference shares pay an
annual fixed dividend of $70
000. The company has 1 000 000 ordinary shares that are trading at
$5.1 per share. The
Australian corporate...
Jekyll Co. has concluded that additional equity financing will be needed to expand operations and that...
Jekyll Co. has concluded that additional equity financing will
be needed to expand operations and that the needed funds will be
best obtained through a rights offering. It has correctly
determined that as a result of the rights offering, the share price
will fall from $54 to $50.60 ($54 is the rights-on price; $50.60 is
the ex-rights price, also known as the when-issued price). The
company is seeking $18 million in additional funds with a per-share
subscription price equal to...
Jekyll Co. has concluded that additional equity financing will be needed to expand operations and that...
Jekyll Co. has
concluded that additional equity financing will be needed to expand
operations and that the needed funds will be best obtained through
a rights offering. It has correctly determined that as a result of
the rights offering, the share price will fall from $55 to $51.00
($55 is the rights-on price; $51.00 is the ex-rights
price, also known as the when-issued price). The company
is seeking $23 million in additional funds with a per-share
subscription price equal to...
Jekyll Co. has concluded that additional equity financing will be needed to expand operations and that...
Jekyll Co. has concluded that additional equity financing will
be needed to expand operations and that the needed funds will be
best obtained through a rights offering. It has correctly
determined that as a result of the rights offering, the share price
will fall from $25 to $22.10 ($25 is the rights-on price;
$22.10 is the ex-rights price, also known as the
when-issued price). The company is seeking $10 million in
additional funds with a per-share subscription price equal to...
1) The lavish carpet manufacturing co. has decided to acquire a new machine that has an...
1) The lavish carpet manufacturing co. has decided to
acquire a new machine that has an economic life of 10 years, with
no residual value. The machine can be purchased for $75,000 and the
supplier is willing to advance $45,000 of the purchase price at 12
percent. The loan is to be repaid in equal instalments over 10
years. Lavish Carpet pays 40 percent corporate income tax and can
claim 20 percent capital cost allowances on the purchased asset. It...
US Inc. has decided to expand its operations to owning and operating car washes. The following...
US Inc. has decided to expand its operations to owning and
operating car washes. The following is an excerpt from the
conversation between the chief executive officer, John Porter and
the vice president of finance, Mc.Call :
John : Mc.Call, have you given any thought to how we're going to
manage the acquisition of Swiffer Car Wash?
Mc.Call: Well, the two basic options, as I see it, are to issue
either preferred stock or bonds. The equity market is a...
(Preparation of Corrected Statement of Financial Position) Bruno Corp. has decided to expand its operations. The...
(Preparation of Corrected Statement of Financial
Position) Bruno Corp. has decided to expand its
operations. The bookkeeper recently completed the following
statement of financial position in order to obtain additional funds
for expansion:
Bruno Corp.
Statement of Financial Position
For the Year Ended December 31, 2020
Current assets
Cash (net of bank overdraft of $30,000)
$260,000
Accounts receivable (net)
340,000
Inventory at the lower of cost and net realizable value
401,000
FV-NI investments (at cost—fair value $120,000)
140,000
Property, plant,...
Bolster Inc. has decided to expand its operations to owning and operating car washes. The following...
Bolster Inc. has decided to expand its operations to owning and
operating car washes. The following is an excerpt from the
conversation between the chief executive officer, Mike O'Brian, and
the vice president of finance, John Ibison:
Mike: John, have you given any thought to how we're going to
manage the acquisition of Swiffer Car Wash?
John: Well, the two basic options, as I see it, are to issue
either preferred stock or bonds. The equity market is a little...
Martinez Corp. has decided to expand its operations. The bookkeeper recently completed the following statement of...
Martinez Corp. has decided to expand its operations. The
bookkeeper recently completed the following statement of financial
position in order to obtain additional funds for
expansion:
MARTINEZ CORP.
Statement of Financial Position
For the Year Ended December 31, 2020
Current assets
Cash (net of bank overdraft of $34,000)
$
410,000
Accounts receivable (net)
526,000
Inventory at the lower of cost and net realizable value
571,000
FV-NI investments (at cost—fair value $310,000)
300,000
Property, plant, and equipment
Buildings (net)
590,000
Equipment...
Ayayai Corp. has decided to expand its operations. The bookkeeper recently completed the following statement of...
Ayayai Corp. has decided to expand its operations. The
bookkeeper recently completed the following statement of financial
position in order to obtain additional funds for
expansion:
AYAYAI CORP.
Statement of Financial Position
For the Year Ended December 31, 2020
Current assets
Cash (net of bank overdraft of $31,000)
$
270,000
Accounts receivable (net)
349,000
Inventory at the lower of cost and net realizable value
411,000
FV-NI investments (at cost—fair value $130,000)
150,000
Property, plant, and equipment
Buildings (net)
580,000
Equipment...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- THIS PROGRAM HAS TO BE WRITTEN IN C Single function to perform the parity computation on...
- Consider a buffer system consisting of Benzoic acid (pKa = 4.20) and sodium benzoate, a) Would...
- Decision Variables S T Minimize 1.8S + 2.20T Subject to: Potassium 5S + 8T >= 200...
- A neurologist needs to counsel a stroke victim and her husband about possible outcomes, treatment options,...
- Case Study: Personal Beliefs in the Workplace Don Shakow was a prominent professional who worked in...
- 1: Competency framework usage is the modern best practice in management. What is meant by competency...
- A 19.34 g mixture of sugar (C12H22O11) and table salt (NaCl) is dissolved in 231 g...
ADVERTISEMENT