You are the CEO of a high-growth technology firm. You plan to raise $160 million to fund

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You are the CEO of a high-growth technology firm. You plan to raise $160 million to fund an expansion by issuing either new shares or new debt. With the expansion, you expect earnings next year of $31 million. The firm currently has 9 million shares outstanding, with a price of $67 per share. Assume perfect capital markets.

a. If you raise the $160 million by selling new shares, what will the forecast for next year’s earnings per share be?

b. If you raise the $160 million by issuing new debt with an interest rate of 8%, what will the forecast for next year’s earnings per share be?

c. What is the firm’s forward P/E ratio (that is, the share price divided by the expected earnings for the coming year) if it issues equity? What is the firm’s forward P/E ratio if it issues debt? How can you explain the difference?

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Corporate Finance The Core

ISBN: 9781292158334

4th Global Edition

Authors: Jonathan Berk, Peter DeMarzo

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