Calculate the debt ratio under both alternatives

Reference no: EM13294036

ORNE Corporation plans to raise $2 million to pay off its existing short-term bank loan of $600,000 and to increase total assets by $1,400,000. The bank loan bears an interest rate of 10 percent. The company's president owns 57.5% percent of the 1,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 30 percent. Balance sheet information is shown below.

The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share.

Current Balance Sheet Current liabilities 900,000
Total Assets 2,600,000 Common Stock, Par $1 1,000,000
Retained earnings 700,000
Total Claims 2,600,000

a. Show the new balance sheet under both alternatives. For Alternatives 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 10 percent of total assets.

d. Calculate the debt ratio under both alternatives

e. Which alternative do you recommend and why?

Reference no: EM13294036

Questions Cloud

Explain the product of the complete hydrolysis contained : The product of the complete hydrolysis contained 1.3 mg of the compound shown below, and no other 2,4-dinitrophenyl derivatives of the amino groups of other amino acids could be found. How may popypeptides are in this protein

What are the alternative methods of controlling motors : What are the advantages and disadvantages of controlling the Induction motor speed by adjusting the voltage What are the alternative methods

Why firms prefer to use accelerated depreciation methods : why are taxes and the tax code important for managerial decision making?

Find the velocity and speed of ball when it reaches ground : You launch a 5kg ball from a height of 1 meter. Find the speed of the ball and its kinetic energy at the top of its trajectory, find the velocity and speed of the ball when it reaches the ground

Calculate the debt ratio under both alternatives : The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share.

Explain what is the wavelength of this electron in m : The velocity of the electron ground state hydrogen atom is 2.2x10^6 m/s. What is the wavelength of this electron in m

The categorical imperative : The Categorical Imperative (CI) is the one and only regulative Law that Kant gives us as the condition for testing whether or not an action, decision or policy is morally justified.

Define what are the concentrations of oh- and h : What are the concentrations of OH- and H in a 0.00075 M solution of Ba(OH)2 at 25 °C? Assume complete dissociation.

How much can notes payable increase without the current : The company plans to raise funds in the short-term debt market and invest the entire amount in additional inventory. How much can notes payable increase without the current ratio falling below 1.50?

User Account

All Pages