Business, 19.03.2021 18:10 elviaortiz402373

The Howland Carpet Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of credit has risen to $275,000, carrying an 8% interest rate. Howland has been 30 to 60 days late in paying trade creditors. Discussions with an investment banker have resulted in the decision to raise $550,000 at this time. Investment bankers have assured the firm that the following alternatives are feasible (flotation costs will be ignored).
Alternative 1: Sell common stock at $8.
Alternative 2: Sell convertible bonds at an 8% coupon, convertible into 100 shares of common stock for each $1,000 bond (i. e., the conversion price is $10 per share).
Alternative 3: Sell debentures at an 8% coupon, each $1,000 bond carrying 100 warrants to buy common stock at $10.
John L. Howland, the president, owns 80% of the common stock and wishes to maintain control of the company. There are 100,000 shares outstanding. The following are extracts of Howland's latest financial statements:
Balance Sheet
Line of credit $275,000
Other current liabilities 125,000
Long-term debt 0
Common stock, par $1 100,000
Retained earnings 50,000
Total assets $550,000
Total claims $550,000
Income Statement
Sales $1,100,000
All costs except interest 990,000
EBIT $ 110,000
Interest 22,000
Pre-tax earnings $ 88,000
Taxes (25%) 22,000
Net income $ 66,000
Shares outstanding 100,000
Earnings per share $ 0.66
Price/earnings ratio 12.95
Market price of stock $ 8.55
1. Show the new balance sheet under each alternative. For Alternatives 2 and 3, show the balance sheet after conversion of the bonds or exercise of the warrants. Assume that half of the funds raised will be used to pay off the bank loan and half to increase total assets.
2. Show Mr. Howland's control position under each alternative, assuming that he does not purchase additional shares. Do not round intermediate calculations.
3. What is the effect on earnings per share of each alternative, assuming that profits before interest and taxes will be 20% of total assets? Do not round intermediate calculations.
4. What will be the debt ratio (TL/TA) under each alternative? Do not round intermediate calculations. Round your answers to the nearest whole number.

Answers: 3

Show answers

Another question on Business

Business, 22.06.2019 10:00

How has internet access changed and affected globalization from 2003 to 2013? a ten percent increase in internet access has had little effect on globalization. a twenty percent decrease in internet access has had little effect on globalization. a thirty percent increase in internet access has sped up globalization. a fifty percent decrease in internet access has slowed down globalization.

Answers: 1

Answer

Business, 22.06.2019 12:10

Profits from using currency options and futures.on july 2, the two-month futures rate of the mexican peso contained a 2 percent discount (unannualized). there was a call option on pesos with an exercise price that was equal to the spot rate. there was also a put option on pesos with an exercise price equal to the spot rate. the premium on each of these options was 3 percent of the spot rate at that time. on september 2, the option expired. go to the oanda.com website (or any site that has foreign exchange rate quotations) and determine the direct quote of the mexican peso. you exercised the option on this date if it was feasible to do so. a. what was your net profit per unit if you had purchased the call option? b. what was your net profit per unit if you had purchased the put option? c. what was your net profit per unit if you had purchased a futures contract on july 2 that had a settlement date of september 2? d. what was your net profit per unit if you sold a futures contract on july 2 that had a settlement date of september 2

Answers: 1

Answer

Business, 22.06.2019 14:30

The face of a company is often that of the lowest paid employees who meet the customers. select one: true false

Answers: 1

Answer

Business, 22.06.2019 17:30

Fabian got into an accident on his way to work. he had multiple fractures in his leg. his doctor advised strict bed rest for at least three months.fabian is a freelance wildlife photographer who usually works on a contract basis, and this is his primary source of income. before the accident, fabian was planning his finances. which goal of his financial plan would fabian in getting through without pay for the next three months? the goal that requires the creation of a/an would fabian get through the next three months without pay.

Answers: 1

Answer

You know the right answer?

The Howland Carpet Company has grown rapidly during the past 5 years. Recently, its commercial bank...

Questions