International Tele-Space Corporation (ITSC) has two divisions, Telecommunication Services and Aerospace. As of the end of its fiscal year on August 31, 2007, ITSC had 37 million shares outstanding with today’s market price of $50.00 and a P/E ratio of 18.50 times. ITSC has $184 million bonds on its balance sheet and the bonds have been rated AA with trading price at their face value. The Company pays the interest payment at the rate of T-bond rate plus the spread based on its bond rating. The current beta for the Company is 1.30 with income tax rate of 35%.

New Investment Opportunity

The Company has won a 10-year government contract to produce the latest model of secret space weapon. To accomplish this, ITSC has established a wholly owned division, Space Industrial Complex (SIC), for the production.

The new division will require a $100 million investment. ITSC has already funded $20 million from its internal funds for this investment and is seeking to determine whether the remaining funds should come from its 2007 income or finance it with all equity or a combination of new debt and equity. The Company is also uncertain about the impact of new debt on its bond rating and capital structure, and would like to know which of the following capital structures (debt-equity ratio) as shown in Table-1 would result in highest value for the investment and shareholders.

1. What is the current EPS?
2. What are the EPS for each proposed capital structure?
3. What is the current interest coverage ratio?
4. What are the interest coverage ratio for each proposed capital structure?
5. What is the current cost of equity and WACC?
6. What are the weighted average costs of capitals (WACC) for each proposed capital structure?

Shares Outstanding	37M		Table 1 - Relationship Between Spread, Bond Rating, and Capital Structure				Operating Income	$4,000,000
Market price	$ 50.00		D/E	Spread	Rating		Earnings Before Interest & Taxes (EBIT)	$169,571,154
P/E	18.5		0.00%	0.75%	AAA		Interest Expense On Debt	$15,725,000
Bonds payable	184M		5.00%	1.00%	AAA		Pretax Income	$153,846,154
Bonds Rating	AA		10.00%	1.50%	AA		Income Taxes	$53,846,154
beta	1.3		25.00%	2.00%	A		Net Income After Taxes	$100,000,000
Tax Rate	35%		50.00%	5.75%	B+
			75.00%	13.00%	CC

Table 4- Income Statement	2007
Net Sales or Revenues	$1,634,571,154		Table 5 Market Information
Cost of Goods Sold	($1,102,000,000)		Securities	Treasuries
Depreciation, Depletion & Amortization	($35,000,000)			Bills	Bonds
Gross Income	$497,571,154		Yields: in 2007	5%	7%
Selling, General & Admin Expenses	$324,000,000		Market Risk Premium	8%	6%

 

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Table 3- Balance Sheet 2007 LIABILITIES 2007 Cash & ST Investments $13,000,000 Accounts Payable $105,000,000 $1,000,000 Receivables (Net) S241,000,000 Short Term Debt & Current Portion of Long-Term 'Debt Inventory-Finished Goods and in Progress Progress Payments & Other S175,000,000 Accrued Payroll $70,000,000 ($30,000,000) Other Current Liabilities $87,000.000 Other Current Assets $47,000.000 Current Liabilities - Total $263,000,000 Current Assets - Total $447,000,000 Long Term Debt S184,000,000 S89,000,000 (S57 000,000) $127.000,000 Provision for Risks and Charges Deferred Taxes Property, Plant & Equipment - Gross Accumulated Depreciation $396,000.000 Other Liabilities S607,000,000 (5218,000,000) Total Liabilities Capital Surplus S207,000 000 563,000,000) S70 000.000 Tangible Other Assets Intangible Other Assets Property, Plant & Equipment - Net 513.000.000 Other Appropriated Reserves $261.000,000 Retained Earnings $384.000,000 $528,000.000 Other Assets $427 000.000 Common Equity 51,134.000.000 $1,134 000.000 Total Liabilities & Shareholders Equity Total Assets Table 3- Balance Sheet 2007 LIABILITIES 2007 Cash & ST Investments $13,000,000 Accounts Payable $105,000,000 $1,000,000 Receivables (Net) S241,000,000 Short Term Debt & Current Portion of Long-Term 'Debt Inventory-Finished Goods and in Progress Progress Payments & Other S175,000,000 Accrued Payroll $70,000,000 ($30,000,000) Other Current Liabilities $87,000.000 Other Current Assets $47,000.000 Current Liabilities - Total $263,000,000 Current Assets - Total $447,000,000 Long Term Debt S184,000,000 S89,000,000 (S57 000,000) $127.000,000 Provision for Risks and Charges Deferred Taxes Property, Plant & Equipment - Gross Accumulated Depreciation $396,000.000 Other Liabilities S607,000,000 (5218,000,000) Total Liabilities Capital Surplus S207,000 000 563,000,000) S70 000.000 Tangible Other Assets Intangible Other Assets Property, Plant & Equipment - Net 513.000.000 Other Appropriated Reserves $261.000,000 Retained Earnings $384.000,000 $528,000.000 Other Assets $427 000.000 Common Equity 51,134.000.000 $1,134 000.000 Total Liabilities & Shareholders Equity Total Assets

Answer rating: 100% (QA)

ANSWER Earnings per percentage EPS is the portion of an agencys profit allocated to every outstanding percentage of common inventory EPS for an enterprise with favored and not unusual inventory net pr... View the full answer