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The Severn Company plans to raise a net amount of $270 million to finance new equipment and working capital in early 2009 Two alternatives are being considered Common stock may be sold to net

The Severn Company plans to raise a net amount of $270 million to finance new equipment and working capital in early 2009. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 12% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows:

Assuming that EBIT equals 10% of sales, calculate earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible level of sales. Then calculate expected EPS and $EPS under both debt and stock financing alternatives. Also calculate the debt ratio and the times-interest-earned (TIE) ratio at the expected sales level under each alternative. The old debt will remain outstanding. Which financing method do yourecommend?

 

Apr 25 2020 View more View Less

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