BUS 4404 UOPEOPLE Principles of Finance And Case Studies
Description
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Reading Assignment
Finance Case Studies by W. R. Allman. Available at Attached
Discussion Assignment
In this week’s Written Assignment we found that the earnings per share of a company decreased if the additional capital it wanted was obtained by issuing additional shares of stock.
Please explain how this phenomenon comes about. Please also discuss how this decrease in EPS would affect a company’s decision whether to issue equity (shares of stock) or debt (a bond issue) for raising capital.
Written Assignment
A company needs $35,943,750 to finance a major project in the company. The company expects that next year’s earnings from current operations and the additional earnings from the new project will be a total of $45,650,000. The company currently has 5,075,000 shares outstanding, with a price of $17.75 per share. The company’s management is assuming that any the additional shares issued to finance the project will not affect the market price of the company’s common stock.
Calculate the following:
- If the $35,943,750 needed for the project is raised by selling new shares, what will the forecast for next year’s earnings per share (EPS) be?
- If the $35,943,750 needed for the project is raised by selling new shares, what will the firm’s price earnings ratio (PE ratio) be?
- If the $35,943,750 needed for the project is raised by issuing new debt, what will the forecast for next year’s earnings per share be? (Assume that there is no “tax shield effect” with issuing corporate debt.)
- If the $35,943,750 needed for the project is raised by issuing new debt, what will the firm’s PE ratio be?
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