Problem 13-13 Financing alternatives The Severn Company plans to raise a net amo
ID: 2734603 • Letter: P
Question
Problem 13-13
Financing alternatives
The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2014. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 12% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows:
The Severn Company: Income Statement for Year Ended December 31, 2014 (Millions of Dollars)
The probability distribution for annual sales is as follows:
Assuming that EBIT equals 10% of sales, calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible level of sales. Round your answers to two decimal places. Write out your answer completely. For example, 0.00013 million should be entered as 130.
Calculate expected EPS under both debt and stock financing alternatives. Round your answers to two decimal places. Write out your answer completely. For example, 0.00013 million should be entered as 130.
Under the debt financing expected EPS is $
Under the stock financing expected EPS is $
Calculate EPS under both debt and stock financing alternatives. Round your answers to two decimal places. Write out your answer completely. For example, 0.00013 million should be entered as 130.
Under the dept financing EPS is $
Under the stock financing EPS is $
Calculate the debt-to-capital ratio and the times-interest-earned (TIE) ratio at the expected sales level under each alternative. The old debt will remain outstanding. [Hint: Notes payable should be included in both the numerator and the denominator of the debt-to-capital ratio.] Round your answers to two decimal places.
Under the debt financing.
Under the stock financing.
Which financing method do you recommend?
a. debt
b. equity
The Severn Company: Balance Sheet as of December 31, 2014(Millions of Dollars) Current assets $ 900.00 Notes payable $ 255.00 Net fixed assets 450.00 Long-term debt (10%) 697.50 Common stock, $3 par 60.00 Retained earnings 337.50 Total assets $1,350.00 Total liabilities and equity $1,350.00
Explanation / Answer
Working:
Annual sales (millions of dollar) EPS under debt financing EPS under stock financing 2250 $ 3.21 $ 5.51 2700 $ 4.56 $ 6.61 3150 $ 5.91 $ 7.71