FINANCING ALTERNATIVES The Severn Company plans to raise a net amount of $270 million to finance new… 1 answer below »


FINANCING ALTERNATIVES The Severn Company plans to discipline a net aggregate of $270 darling to finance new equipment and started excellent in forthcoming 2009. Two resources are being considered: Common hoard may be sold to net $60 per divide, or bonds producing 12% may be issued. The counterpoise sheet and proceeds announcement of the Severn Company anterior to financing are as follows:

The Severn Company: Counterpoise Sheet as of December 31, 2008 (Millions of Dollars)

Current assets

$ 900.00

Accounts payable

$ 172.50

  

Notes payable to bank

255.00

  

Other vulgar liabilities

225.00

  

Total vulgar liabilities

$ 652.50

Net unwandering assets

450.00

Long-term liability (10%)

300.00

  

Common hoard, $3 par

60.00

  

Retained rights

337.50

Total assets

$1,350.00

Total liabilities and equity

$1,350.00

 

The Severn Company: Proceeds Announcement for Year

Ended December 31, 2008 (Millions of Dollars)

Sales

$2,475.00

Operating costs

2,227.50

Earnings precedently distribute and taxes (10%)

$ 247.50

Interest on short-term liability

15.00

Interest on long-term liability

30.00

Earnings precedently taxes

$ 202.50

Federal-plus-state taxes (40%)

81.00

Net proceeds

$ 121.50

 

The presumption division for annual sales is as follows:

 

Probability

Annual Sales (Millions of Dollars)

0.30

$2,250

0.40

2,700

0.30

3,150

 

Assuming that EBIT equals 10% of sales, number rights per divide (EPS) below the liability financing and the hoard financing resources at each potential plane of sales. Then number expected EPS and σEPS below twain liability and hoard financing resources. Also number the liability kinsman and the times-interest-earned (TIE) kinsman at the expected sales plane below each resource. The old liability obtain accrue unappropriated. Which financing rule do you approve?