Question

For the year ended June 30, 2011, A. E. G. Enterprises presented the financial state-ments below.
Early in the new fiscal year, the officers of the firm formalized a substantial expansion plan. The plan will increase fixed assets by $ 190 million.
In addition, extra inventory will be needed to support expanded production. The increase in inventory is purported to be $ 10 million.
The firm’s investment bankers have suggested the following three alternative financing plans:
Plan A: Sell preferred stock at par, 5%.
Plan B: Sell common stock at $ 10 per share.
Plan C: Sell long- term bonds, due in 20 years, at par ($ 1,000), with a stated interest rate of 8%.


Income statement


Required
a. For the year ended June 30, 2011, compute:
1. Times interest earned
2. Debt ratio
3. Debt/ equity ratio
4. Debt to tangible net worth ratio
b. Assuming the same financial results and statement balances, except for the increased assets and financing, compute the same ratios as in (a) under each financing alternative. Do not attempt to adjust retained earnings for the next year’s profits.
c. Changes in earnings and number of shares will give the following earnings per share: Plan A— 0.73, Plan B— 0.69, and Plan C— 0.73. Based on the information given, discuss the advantages and disadvantages of each alternative.
d. Why does the 5% preferred stock cost the company more than the 8%bonds?


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  • CreatedMay 28, 2014
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