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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.

    $2.19