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Capital Structure Analysis

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A company needs $500,000,000 to finance a major project in the company. The company is expected to generate a total of $80,000,000 in earnings next year with the addition of this project. The company currently has 50,000,000 million shares outstanding, with a price of $25 per share. Assume perfect capital markets. Complete the following actions:

a. If the $500,000,000 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?

c. If the $500,000,000 needed for the project is raised by issuing debt instead of equity, what will the forecast for next year's earnings per share?

d. What is the firm's forward P/E ratio if it issues debt?

e. Explain the difference.

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Solution Preview

A company needs $500,000,000 to finance a major project in the company. The company is expected to generate a total of $80,000,000 in earnings next year with the addition of this project. The company currently has 50,000,000 million shares outstanding, with a price of $25 per share. Assume perfect capital markets. Complete the following actions:
(Please note that the number of existing shares is given as 50,000,000 million shares. However I have taken this as 50,000,000 shares, as it is more reasonable.)

a. If the $500,000,000 needed for the project is raised by selling new shares, ...

Solution Summary

Solution provides detailed answers (with all the steps involved in the calculations, and a worded paragraph to point e) to all the 5 questions.

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Capital Structure Analysis: Pfizer Pharmaceutical Information

Using attached Pfizer Pharmaceutical information. Assume that the company will engage in a major capital acquisition program that is expected to improve EBIT by 10%. Do the following:

1) Calculate the EBIT/EPS for debt financing. Discuss the financial implications. Document the source of your information

2) Calculate the EBIT/EPS for equity finance. Discuss the financial implications. Document the source of your information

3) Based upon the calculations above, recommend the best capital structure. Document the source of your information.

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