Use debt or equity financing to raise the additinal funds

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Reference no: EM13913106

Piper Pickle Company is a major packer of pickles and pickled products (horseradish, pickled watermelon rinds, relishes, and peppers). The company’s stock is widely held, actively traded, and listed on the New York Stock Exchange. Recently, it has been trading in the range of $18 to $22 a share. The latest 12 months’ earnings were $1.70 per share. The current dividend rate is 64 cents a share, and earnings, dividends, and the price of the company’s stock have been growing at a rate of about 7 percent over the last few years. Piper Pickle’s debt ratio is currently 42 percent versus 25 percent for other large pickle packers. Other firms in the industry, on the average, have been growing at a rate of about 5 percent a year, and their stocks have been selling at a price/earnings ratio of about 10. Piper Pickle has an opportunity to begin growing its own cucumbers, which would result in a substantial cost savings and reduce the risk involved in having to compete for cucumbers in the open market. This vertical integration would require $20 million in cash for the necessary farms and equipment. Should the company use debt or equity financing to raise the additinal funds. Explain your answer.

Reference no: EM13913106

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