Conrad Corporation plans to raise $8 million to pay off its existing short-term bank loan of $2.4 million and to increase total assets by $5,600,000. The bank loan bears an interest rate of 12 percent. The company's president owns 55% of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 21%. Balance sheet information is shown below. The company is considering two alternatives to raise the $8 million: (1) sell common stock at $20 per share, or (2) Sell bonds at a 12% coupon, each $1,000 bond carrying 25 warrants to buy common stock at $30 per share. Current Liabilities $3,000,000 Common Stock, Par $0.50 2,000,000 Retained earnings 1,400,000 Total Assets $6,400,000 Total claims $6,400,000 Alternative 1: Common stock $20 Tax rate 35% # new shares 400,000 New financing $8,000,000 Par value per share $0.50 Existing Loan $2,400,000 Interest rate 12% Alternative 2: Debentures 12% Interest amount - old $288,000 Exercise price per warrant $30 Interest amount - new $960,000 # bonds to raise 4M 8,000 # new shares 200,000 President owns 55.0% warrants per bond 25 Shares outstanding 4,000,000 New money raised 6,000,000 Addition to par 100,000 Additional paid-in capital 5,900,000 a. Show the new balance sheet under both alternatives. For Alternative 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 20% of total assets. d. Calculate the debt ratio under both alternatives e, Which alternative do you recommend and why?
Conrad Corporation plans to raise $8 million to pay off its existing short-term bank loan of $2.4 million and to increase total assets by $5,600,000. The bank loan bears an interest rate of 12 percent. The company's president owns 55% of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 21%. Balance sheet information is shown below. The company is considering two alternatives to raise the $8 million: (1) sell common stock at $20 per share, or (2) Sell bonds at a 12% coupon, each $1,000 bond carrying 25 warrants to buy common stock at $30 per share. Current Liabilities $3,000,000 Common Stock, Par $0.50 2,000,000 Retained earnings 1,400,000 Total Assets $6,400,000 Total claims $6,400,000 Alternative 1: Common stock $20 Tax rate 35% # new shares 400,000 New financing $8,000,000 Par value per share $0.50 Existing Loan $2,400,000 Interest rate 12% Alternative 2: Debentures 12% Interest amount - old $288,000 Exercise price per warrant $30 Interest amount - new $960,000 # bonds to raise 4M 8,000 # new shares 200,000 President owns 55.0% warrants per bond 25 Shares outstanding 4,000,000 New money raised 6,000,000 Addition to par 100,000 Additional paid-in capital 5,900,000 a. Show the new balance sheet under both alternatives. For Alternative 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 20% of total assets. d. Calculate the debt ratio under both alternatives e, Which alternative do you recommend and why?
Chapter2: The Domestic And International Financial Marketplace
Section2.A: Taxes
Problem 2P
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Conrad Corporation plans to raise $8 million to pay off its existing short-term bank loan of $2.4 million and to increase total assets by $5,600,000. The bank loan bears an interest rate of 12 percent. The company's president owns 55% of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 21%.
The company is considering two alternatives to raise the $8 million: (1) sell common stock at $20 per share, or (2) Sell bonds at a 12% coupon, each $1,000 bond carrying 25 warrants to buy common stock at $30 per share.
| Current Liabilities | $3,000,000 | ||||
| Common Stock, Par $0.50 | 2,000,000 | ||||
| 1,400,000 | |||||
| Total Assets | $6,400,000 | Total claims | $6,400,000 | ||
| Alternative 1: Common stock | $20 | Tax rate | 35% | ||
| # new shares | 400,000 | New financing | $8,000,000 | ||
| Par value per share | $0.50 | Existing Loan | $2,400,000 | ||
| Interest rate | 12% | ||||
| Alternative 2: Debentures | 12% | Interest amount - old | $288,000 | ||
| Exercise price per warrant | $30 | Interest amount - new | $960,000 | ||
| # bonds to raise 4M | 8,000 | ||||
| # new shares | 200,000 | President owns | 55.0% | ||
| warrants per bond | 25 | Shares outstanding | 4,000,000 | ||
| New money raised | 6,000,000 | ||||
| Addition to par | 100,000 | ||||
| Additional paid-in capital | 5,900,000 |
a. Show the new balance sheet under both alternatives. For Alternative 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 20% of total assets.
d. Calculate the debt ratio under both alternatives
e, Which alternative do you recommend and why?
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