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…

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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              =

$400,000+$300,000+$240,000=

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?

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