The Radford Company currently has 100,000 shares of common stock outstanding with a market price of $23 per share. It also has 5 million outstanding in 6% 15 year bonds. The company is considering a $2 million expansion program that it can finance with: A) All common stock at $22 a share, B) $2 million in bonds at 8% interest, or C) Half common stock at $21 a share, and half bonds at 6%.
The best estimate available for the company’s EBIT after the expansion is .5 probability of $800,000 and .3 probability of $1,000,000, and .2 probability of $1,250,000. The corporation’s tax rate is 40%.
1. What is the expected EBIT after the expansion? (Show your calculations.)
.5 X $800,000 =
.3 X $1,000,000 =
.2 X $1,200,000 =
2. What are the expected earnings after taxes for each expansion financing plan option?
Show YOUR CALCULATIONS .
Plan A. __________ Plan B. ___________ Plan C. __________
3. What is the expected EPS for each option? (
Plan A. EPS ________ Plan B. EPS __________ Plan C. EPS ____________
4. What is the expected return on equity investment for investors for each plan option?
Plan A_______ Plan B________ Plan C__________
5. Which financing plan do you recommend?