Earnings per share and P/E Ratio

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Given the following situation, complete the analysis and prepare a 4-5 page report showing the computations and conclusions.

A company needs $ 36 Million to finance a major project in the company. The company is expected to generate a total of $ 81 Million in earnings next year with the addition of this project. The company currently has 10 million shares outstanding, with a price of $ 4.00 per share. Assume perfect capital markets. Complete the following actions:

a. If the $36 Million needed for the project is raised by selling new shares, what will the forecast for next year's earnings per share be?

b. What is the firm's P/E if the company issues equity? What is the firm's forward P/E ratio if it issues debt? Explain the difference.

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Solution Summary

Solution provides detailed calculations (with all the steps) for the two questions. The difference between the P/E ratios in case of equities and debts are also discussed in the solution.

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