Purchase Solution

Sell common stock, sell bonds with warrants for stock

Not what you're looking for?

Ask Custom Question

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?

Purchase this Solution
Solution Summary

The solution examines selling common stock and selling bonds with warrants for stock.

Solution Preview

ANSWERS
Please see attached file for answers.

(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 ...

Purchase this Solution
Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

View More Free Quizzes
Related BrainMass Solutions

  • Homework Assistance

    Its 8% convertible bonds (issued at par $1000) now sell for $950. The bonds can be converted into 40 shares of common stock. What is the conversion price?

  • Bonds with detachable warrants

    Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Logan's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96.

  • This post addresses paid-in capital from stock warrants.

    In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95.

  • Capital Decisions: Equity, Convertible Bonds, Warrants

    Alternative 2: Sell convertible bonds at an 8 percent coupon, convertible into 100 shares of common stock for each $1,000 bond (that is, the conversion price is $10 per share).

  • Hybrid Debt

    399334 Warren Corp: Coupon interest rate on bonds in order to sell bonds-with-warrants at par Warren Corporation's stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds.

  • Warrants

    Assume the firm's stock now sells for $20 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25.

  • Coupon interest rate on warrants

    What coupon interest rate must the company set on the bonds-with-warrants if the bonds are to sell at par? The bonds and warrants should sell at the value of $1,000 which is the par value.

  • Coupon Interest Rate on Warrants

    148803 Coupon Interest Rate on Warrants Shearson PLC's stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds.

  • Capital structure/Balance Sheet

    Alternative 1: Sell Common stock at $8. Alternative 2: Sell convertible bonds at an 8% coupon, each $1000 bond carrying 100 warrants to buy common stock at $10.

View More Related Solutions