Marcell Medical Goods is embarking on a massive expansion. Assume the plans call for opening 40 new
Question:
The board of directors is considering obtaining the $7.75 million either through borrowing at 5% or by issuing an additional 100,000 shares of common stock. This year the company has earned $3 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 $77.50 per share. Assume that income before interest and taxes is expected to grow by 10% 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 Marcell’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...
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Related Book For
Financial Accounting
ISBN: 978-0133427530
10th edition
Authors: Walter Harrison, Charles Horngren, William Thomas
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