B.C. Fine Wines Limited is considering modernizing its winery at a cost of $500 million; the...

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B.C. Fine Wines Limited is considering modernizing its winery at a cost of $500 million; the upgrade will reduce cost of goods sold by 20%. B.C. Fine Wines can pay for the equipment by issu- ing new equity or new bonds on January 2, 2009. The debt would be at 10% interest. Shares cur- rently sell for $50 each. There are 10 million shares currently outstanding. If new shares are issued, the dividend would have to be raised next year by 25% just to interest new shareholders in buying the new shares. The 2010 income statement and statement of retained earnings for B.C. Fine Wines are as follows: B.C. Fine Wines Limited Income Statement for the year ended December 31, 2010 (in $ millions) Sales Less: Cost of goods sold Gross profit Selling and administration expenses Earnings before interest and taxes (EBIT) Less: Interest expense Earnings before taxes Less: Income tax expense Net income B.C. Fine Wines Limited Statement of Retained Earnings for the year ended December 31, 2010 (in $ millions) Opening retained earnings, January 1 Add: Net income Less: Dividends paid Closing retained earnings, December 31 500 ៩ ៩៖ “ធ្ម 88 8|8| 300 200 75 125 65 60 30 30 150 30 (20) 160 Required: (a) Prepare a pro forma income statement and statement of retained earnings for 2011 under both the debt issue and share issue options, assuming 2011 sales match 2010 sales and the tax rate remains unchanged. (b) Calculate the 2011 earnings per share under both options. (c) Which option would you advise B.C. Fine Wines Limited to pursue? B.C. Fine Wines Limited is considering modernizing its winery at a cost of $500 million; the upgrade will reduce cost of goods sold by 20%. B.C. Fine Wines can pay for the equipment by issu- ing new equity or new bonds on January 2, 2009. The debt would be at 10% interest. Shares cur- rently sell for $50 each. There are 10 million shares currently outstanding. If new shares are issued, the dividend would have to be raised next year by 25% just to interest new shareholders in buying the new shares. The 2010 income statement and statement of retained earnings for B.C. Fine Wines are as follows: B.C. Fine Wines Limited Income Statement for the year ended December 31, 2010 (in $ millions) Sales Less: Cost of goods sold Gross profit Selling and administration expenses Earnings before interest and taxes (EBIT) Less: Interest expense Earnings before taxes Less: Income tax expense Net income B.C. Fine Wines Limited Statement of Retained Earnings for the year ended December 31, 2010 (in $ millions) Opening retained earnings, January 1 Add: Net income Less: Dividends paid Closing retained earnings, December 31 500 ៩ ៩៖ “ធ្ម 88 8|8| 300 200 75 125 65 60 30 30 150 30 (20) 160 Required: (a) Prepare a pro forma income statement and statement of retained earnings for 2011 under both the debt issue and share issue options, assuming 2011 sales match 2010 sales and the tax rate remains unchanged. (b) Calculate the 2011 earnings per share under both options. (c) Which option would you advise B.C. Fine Wines Limited to pursue?

Answer rating: 100% (QA)

a Pro forma Income Statement for 2011 Debt Issue Option Sales 500 million same as 2010 Cost of goods sold 200 million same as 2010 Gross profit 300 mi... View the full answer