Hillside Medical Goods is embarking on a massive expansion. Assume plans call for opening 20 new stores

Question:

Hillside Medical Goods is embarking on a massive expansion. Assume plans call for opening 20 new stores during the next two years. Each store is scheduled to be 30% larger than the company’s existing locations, offering more items of inventory and with more elaborate displays. Management estimates that company operations will provide $1 million of the cash needed for expansion. Hillside Medical must raise the remaining $6.75 million from outsiders. The board of directors is considering obtaining the $6.75 million either through borrowing at 6% or by issuing an additional 100,000 shares of common stock. Tis year the company has earned $2 million before interest and taxes and has 100,000 shares of $1-par common stock outstanding. The market price of the company’s stock is $67.50 per share. Assume that income before interest and taxes is expected to grow by 20% each year for the next two years. The company’s marginal income tax rate is 35%.


Requirement

1. Use Excel to evaluate the effect of the above projected alternatives on net income and earnings per share two years from now.

2. Write a memo to Hillside’s management discussing the advantages and disadvantages of borrowing and of issuing common stock to raise the needed cash. Which method of raising the funds would you recommend?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Financial Accounting

ISBN: 978-0133427530

10th edition

Authors: Walter Harrison, Charles Horngren, William Thomas

Question Posted: