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A firm that wants to raise $15 million has 800,000 common shares outstanding with a current market value of $25 and has $10,000,000 bonds with a 5% annual coupon payment. The firm's tax rate is 40 percent.
(a)The alternatives are to issue common shares or toissue15-year bonds, at face value, with annual coupon payments of 8percent. Issuing and underwriting costs can be ignored. Compute the indifference EBIT between common shares and bonds. If expected EBIT is greater than the indifference EBIT which financing option should be pursued?
(b)The $15million could also be raised by issuing preferred shares at $100per share with an annual dividend rate of 10percent. Issuing and underwriting costs can be ignored. Compute the indifference EBIT between common shares and preferred shares. If expected EBIT is less than the indifference EBIT which financing option should be pursued?
(c)Is a decision based on maximizing EPS appropriate? What additional factor(s)must be considered before a decision is made? Discuss
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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