Option 1
Option 1: Traditional bond issue with a $30 million face value, stated rate of 2.5% and interest payments due semiannually. The debt matures in 10 years. The debt is expected to issue at par and the underwriter’s is expected to charge $200,000 to take the issue to market. Pro-forma EBIT, Net Income after tax, Basic and Diluted EPS given Option 1 for raising capital needed.
Given Solved
N 20 Additional Information: The firm is a non-dividend paying firm (i.e., neither common nor preferred stockholders are paid a dividend). There are 2 million shares of common stock outstanding, this balance of outstanding common stock is expected to remain consistent over the 10 year period. Earnings before interest and taxes is expected to $12 million dollars in the first year with a 5% increase year over year. The tax rate is 21%.
I 1.25%
PMT $ 375,000.00
FV $ 30,000,000.00
PV $30,000,000.00
Begin 0
JE Debit Credit Credit Debit Credit Earnings before interest and taxes (EBIT) Net Income after Interest and Taxes
Date Int Expense Payment Amortization Carrying Value Issue Expense Unamort. BIC Basic EPS Diluted EPS
Period 0 $30,000,000.00
Period 1 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00
Period 2 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00 $ 12,000,000.00 $ 8,871,700.00 $ 4.44 $ – 0
Period 3 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00
Period 4 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00 $ 12,600,000.00 $ 9,345,700.00 $ 4.67 $ – 0
Period 5 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00
Period 6 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00 $ 13,230,000.00 $ 9,843,400.00 $ 4.92 $ – 0
Period 7 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00
Period 8 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00 $ 13,891,500.00 $ 10,365,985.00 $ 5.18 $ – 0
Period 9 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00
Period 10 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00 $ 14,586,075.00 $ 10,914,699.25 $ 5.46 $ – 0
Period 11 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00
Period 12 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00 $ 15,315,378.75 $ 11,490,849.21 $ 5.75 $ – 0
Period 13 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00
Period 14 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00 $ 16,081,147.69 $ 12,095,806.67 $ 6.05 $ – 0
Period 15 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00
Period 16 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00 $ 16,885,205.07 $ 12,731,012.01 $ 6.37 $ – 0
Period 17 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00
Period 18 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00 $ 17,729,465.33 $ 13,397,977.61 $ 6.70 $ – 0
Period 19 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00
Period 20 $ 375,000.00 $ 375,000.00 $ 0.00 $ 30,000,000.00 $ 10,000.00 $ 10,000.00 $ 18,615,938.59 $ 14,098,291.49 $ 7.05 $ – 0
Option 2
Option 2: Convertible bonds issued with a $28 million face value, stated rate of 2.5% and interest payments due semi-annually. The debt matures in 10 years and the conversion price of the debt is $200. The expected issuance price of the debt is expected to be $30 million and the underwriter’s is expected to charge $250,000 to take the issue to market. Pro-forma EBIT, Net Income after tax, Basic and Diluted EPS given Option 2 for raising capital needed.
Given Solved
N 20 Additional Information: The firm is a non-dividend paying firm (i.e., neither common nor preferred stockholders are paid a dividend). There are 2 million shares of common stock outstanding, this balance of outstanding common stock is expected to remain consistent over the 10 year period. Earnings before interest and taxes is expected to $12 million dollars in the first year with a 5% increase year over year. The tax rate is 21%.
I 0.86%
PMT $ 350,000.00
FV $ 28,000,000.00
PV $30,000,000.00
Begin 0
JE Debit Credit Debit Debit Credit Earnings before interest and taxes (EBIT) Net Income after Interest and Taxes
Date Int Expense Payment Amortization Carrying Value Issue Expense Unamort. BIC Basic EPS Diluted EPS
Period 0 $30,000,000.00
Period 1 $ 257,922.96 $ 350,000.00 $ 92,077.04 $ 29,907,922.96 $ 12,500.00 $ 12,500.00
Period 2 $ 257,131.33 $ 350,000.00 $ 92,868.67 $ 29,815,054.29 $ 12,500.00 $ 12,500.00 $ 12,000,000.00 $ 9,053,357.11 $ 4.53 $ 4.43
Period 3 $ 256,332.90 $ 350,000.00 $ 93,667.10 $ 29,721,387.20 $ 12,500.00 $ 12,500.00
Period 4 $ 255,527.61 $ 350,000.00 $ 94,472.39 $ 29,626,914.80 $ 12,500.00 $ 12,500.00 $ 12,600,000.00 $ 9,529,880.20 $ 4.76 $ 4.65
Period 5 $ 254,715.39 $ 350,000.00 $ 95,284.61 $ 29,531,630.19 $ 12,500.00 $ 12,500.00
Period 6 $ 253,896.18 $ 350,000.00 $ 96,103.82 $ 29,435,526.37 $ 12,500.00 $ 12,500.00 $ 13,230,000.00 $ 10,030,146.86 $ 5.02 $ 4.88
Period 7 $ 253,069.94 $ 350,000.00 $ 96,930.06 $ 29,338,596.31 $ 12,500.00 $ 12,500.00
Period 8 $ 252,236.59 $ 350,000.00 $ 97,763.41 $ 29,240,832.90 $ 12,500.00 $ 12,500.00 $ 13,891,500.00 $ 10,555,342.85 $ 5.28 $ 5.13
Period 9 $ 251,396.07 $ 350,000.00 $ 98,603.93 $ 29,142,228.97 $ 12,500.00 $ 12,500.00
Period 10 $ 250,548.33 $ 350,000.00 $ 99,451.67 $ 29,042,777.30 $ 12,500.00 $ 12,500.00 $ 14,586,075.00 $ 11,106,713.17 $ 5.55 $ 5.38
Period 11 $ 249,693.30 $ 350,000.00 $ 100,306.70 $ 28,942,470.60 $ 12,500.00 $ 12,500.00
Period 12 $ 248,830.92 $ 350,000.00 $ 101,169.08 $ 28,841,301.53 $ 12,500.00 $ 12,500.00 $ 15,315,378.75 $ 11,685,565.07 $ 5.84 $ 5.65
Period 13 $ 247,961.13 $ 350,000.00 $ 102,038.87 $ 28,739,262.66 $ 12,500.00 $ 12,500.00
Period 14 $ 247,083.86 $ 350,000.00 $ 102,916.14 $ 28,636,346.51 $ 12,500.00 $ 12,500.00 $ 16,081,147.69 $ 12,293,271.13 $ 6.15 $ 5.94
Period 15 $ 246,199.04 $ 350,000.00 $ 103,800.96 $ 28,532,545.56 $ 12,500.00 $ 12,500.00
Period 16 $ 245,306.62 $ 350,000.00 $ 104,693.38 $ 28,427,852.18 $ 12,500.00 $ 12,500.00 $ 16,885,205.07 $ 12,931,272.53 $ 6.47 $ 6.23
Period 17 $ 244,406.53 $ 350,000.00 $ 105,593.47 $ 28,322,258.70 $ 12,500.00 $ 12,500.00
Period 18 $ 243,498.69 $ 350,000.00 $ 106,501.31 $ 28,215,757.40 $ 12,500.00 $ 12,500.00 $ 17,729,465.33 $ 13,601,082.48 $ 6.80 $ 6.54
Period 19 $ 242,583.06 $ 350,000.00 $ 107,416.94 $ 28,108,340.45 $ 12,500.00 $ 12,500.00
Period 20 $ 241,659.55 $ 350,000.00 $ 108,340.45 $ 28,000,000.00 $ 12,500.00 $ 12,500.00 $ 18,615,938.59 $ 14,304,289.83 $ 7.15 $ 6.87
Option 3
Option 2: 28,000 $1000 bonds each with a detachable warrant are issued with a $28 million face value, stated rate of 2.5% and interest payments due semi-annually. The debt matures in 10 years. The bonds without the warrants would issue at face value and the underwriter’s is expected to charge $300,000 to take the issue to market. The exercise price for each warrant is $14. Pro-forma EBIT, Net Income after tax, Basic and Diluted EPS given Option 2 for raising capital needed.
Given Solved
N 20 Additional Information: The firm is a non-dividend paying firm (i.e., neither common nor preferred stockholders are paid a dividend). There are 2 million shares of common stock outstanding, this balance of outstanding common stock is expected to remain consistent over the 10 year period. Earnings before interest and taxes is expected to $12 million dollars in the first year with a 5% increase year over year. The stock price is $11 per share in the first year and is expected to increase 4% year over year. The tax rate is 21%.
I 1.25%
PMT $ 350,000.00
FV $ 28,000,000.00
PV $28,000,000.00
Begin 0
JE Debit Credit Credit Debit Credit Earnings before interest and taxes (EBIT) Net Income after Interest and Taxes
Date Int Expense Payment Amortization Carrying Value Issue Expense Unamort. BIC Stock Price Strike Price Basic EPS Diluted EPS
Period 0 $28,000,000.00
Period 1 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00
Period 2 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00 $ 12,000,000.00 $ 8,903,300.00 $ 11.00 $ 14.00 $ 4.45 $ 4.47
Period 3 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00
Period 4 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00 $ 12,600,000.00 $ 9,377,300.00 $ 11.44 $ 14.00 $ 4.69 $ 4.70
Period 5 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00
Period 6 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00 $ 13,230,000.00 $ 9,875,000.00 $ 11.90 $ 14.00 $ 4.94 $ 4.95
Period 7 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00
Period 8 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00 $ 13,891,500.00 $ 10,397,585.00 $ 12.37 $ 14.00 $ 5.20 $ 5.21
Period 9 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00
Period 10 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00 $ 14,586,075.00 $ 10,946,299.25 $ 12.87 $ 14.00 $ 5.47 $ 5.48
Period 11 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00
Period 12 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00 $ 15,315,378.75 $ 11,522,449.21 $ 13.38 $ 14.00 $ 5.76 $ 5.76
Period 13 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00
Period 14 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00 $ 16,081,147.69 $ 12,127,406.67 $ 13.92 $ 14.00 $ 6.06 $ 6.06
Period 15 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00
Period 16 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00 $ 16,885,205.07 $ 12,762,612.01 $ 14.48 $ 14.00 $ 6.38 $ 6.38
Period 17 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00
Period 18 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00 $ 17,729,465.33 $ 13,429,577.61 $ 15.05 $ 14.00 $ 6.71 $ 6.71
Period 19 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00
Period 20 $ 350,000.00 $ 350,000.00 $ – 0 $ 28,000,000.00 $ 15,000.00 $ 15,000.00 $ 18,615,938.59 $ 14,129,891.49 $ 15.66 $ 14.00 $ 7.06 $ 7.05
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