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Calculating shares of stock, earnings per share, and market

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I'm not sure exactly how to get started. The more I read into it, the more ways I find to come up with solutions and they are all different. Any help would be greatly appreciated. Here is the problem.

A corporation is planning to expand its business and needs $30,000,000. The company believes that a 12-year term loan can be negotiated with a bank at an annual rate of 10%. Alternatively, an investment banking firm has indicated that it is willing to underwrite a common stock issue for a spread of 5%. Wheeler currently has 2,000,000 common shares outstanding.

(a) If new shares of stock can be sold for $30 per share, how many shares of stock must be sold to net the $30,000,000 that the corporation needs, assuming out-of-pocket expenses of $600,000?

(b) If earnings before interest and taxes increase to $10,000,000 and the applicable tax rate is 34%, what would the earnings per share be under each financing alternative? (Assume annual interest before financing of $1,000,000)

(c) Compute the approximate market price of the common stock if the P/E ratio remains at 10 if new stock is issued but falls to 9.5 if the money is borrowed

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A corporation is planning to expand its business and needs $30,000,000. The company believes that a 12-year term loan can be negotiated with a bank at an annual rate of 10%. Alternatively, an investment banking firm has indicated that it is willing to underwrite a common stock issue for a spread of 5%. Wheeler currently has 2,000,000 common shares outstanding.

(a) If new shares of stock can be sold for $30 per share, how many shares of stock must be sold to net the $30,000,000 ...

Solution Summary

This solution is comprised of a detailed explanation to answer if new shares of stock can be sold for $30 per share, how many shares of stock must be sold to net the $30,000,000 that the corporation needs, assuming out-of-pocket expenses of $600,000?

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See Also This Related BrainMass Solution

Mergers, LBO's, Divestitures and Business Failure

Please see the attachment.
Connor Shoe Company is contemplating the acquisition of Salinas Boots, a firm that has shown large operating tax losses
over the past few years. As a result of the acquisition, Connors believes that the total pretax profits of the merger will not change
from their present level for 15 years. The tax loss carry-forward of Salinas is $800,000. and the Connors projects that its annual
earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings per are assumed to fall
within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm
is in the 40% tax bracket.

A. If the Connors does not make the acquistion, what will the company's tax liability and earnings after taxes each year
over the next 15 years?

B. If the acquisition is made, what will be the company's tax liability and earnings after taxes each year over the next
15 years?

C. If Salinas can be acquired for $350,000 in cash, should Connors make the acquisition, judging on the basis of
tax considerations?(Ignore Present Value)
Data for Henry Company and Mayer Services are given in the following table. Henry Company is considering merging
with Mayer by swapping 1.25 shares of stock for each of Mayer Stock. Henry Company expects its stock to sell
at the same price/earnings multiple after the merger as before merging.

Items
Earninngs Available for common stock
Number of Shares of common stock outstanding
Market Price Per Share

A. Calculate the ratio of exchange in market price

B. Calculate the earnings per share and price/earnings ratio for each company

C. Calculate the price/earnings ratio used to purchase Mayer Services

D. Calculate the postmerger earnings per share for Henry Company.

E. Calculate the expected market price per share of the merged firm. Discuss this result in light of your
findings in part A.

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