Sell common stock, sell bonds with warrants for stock
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A firm plans to raise $2 million to pay off its existing short-term bank loan of $600,000 and to increase total assets by $1,400,000. The bank loan bears an interest rate of 10 percent. The company's president owns 57.5% percent of the 1,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 30 percent. Balance sheet information is shown below.
The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share.
a. Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of the warrants.
b. Calculate the president's ownership position for both alternatives. He doesn't buy any of the additional shares.
c. Calculate earnings per share for both alternatives, assuming that EBIT is 10 percent of total assets.
d. Calculate the debt ratio under both alternatives
e. Which alternative do you recommend and why?
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Solution Summary
The solution examines selling common stock and selling bonds with warrants for stock.
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ANSWERS
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(Assumption is that there is $10 million initial asset)
Alternative 1 Requirement A
Total Liabilities -
Total Equity 11,400,000
Total Assets 11,400,000 Total Liabilities & Equity 11,400,000 ...
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