Please show work Question 2. (20 points) TRANE Corporation plans to raise $4mill
ID: 2600519 • Letter: P
Question
Please show work
Question 2. (20 points) TRANE Corporation plans to raise $4million to pay off its existing short-term bank loan of $1.2 million and to increase total assets by $2,800,000. The bank loan bears an interest rate of 11 percent. The company's president owns 55% of the 10,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 30 percent. Balance s0heet information is shown below.
The company is considering two alternatives to raise the $4 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 12% coupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share.
Current Balance Sheet
Current Liabilities
$1,500,000
Common Stock, Par $0.10
1,000,000
Retained earnings
700,000
Total Assets
$3,200,000
Total claims
$3,200,000
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 12% of total assets.
d. Which alternative do you recommend and why?
e. Calculate the debt ratio under both alternatives
Current Balance Sheet
Current Liabilities
$1,500,000
Common Stock, Par $0.10
1,000,000
Retained earnings
700,000
Total Assets
$3,200,000
Total claims
$3,200,000
Explanation / Answer
Two Alternative s to raise the capital 1 2 Sell common stock $10*X Sell bonds at a12% $4,000,000 50% (warrant) $2,000,000 Capital $45,000,000 Buy Common stock face value@$0.10 200000 Buy Common stock $3,000,000 Bonds $2,000,000 Capital $45,000,000 Capital $5,000,000