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Capital Structure Analysis

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.

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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