Homework Help Forum: financial management

Posted by donna on Sunday, October 25, 2009 at 9:02pm.

Wheeler Corporation is planning to expand its business and needs $30,000,000. The company believes that a 12-year term loan can be negotiated with a bank at an annual rate of 10%. Alternatively, an investment banking firm has indicated that it is willing to underwrite a common stock issue for a spread of 5%. Wheeler currently has 2,000,000 common shares outstanding. (a) If new shares of Wheeler's stock can be sold for $30 per share, how many shares of stock must be sold to net the $30,000,000 that Wheeler needs, assuming out-of-pocket expenses of $600,000? (b) If Wheeler's earnings before interest and taxes increase to $10,000,000 and the applicable tax rate is 34%, what would the earnings per share be under each financing alternative? (Assume annual interest before financing of $1,000,000) (c) Compute the approximate market price of the common stock if the P/E ratio remains at 10 if new stock is issued but falls to 9.5 if the money is borrowed.

• financial management - Ms. Sue, Sunday, October 25, 2009 at 9:21pm

  (a) If new shares of Wheeler's stock can be sold for $30 per share, how many shares of stock must be sold to net the $30,000,000 that Wheeler needs, assuming out-of-pocket expenses of $600,000? Apparently, Wheeler needs $30,600,000. 30,600,000 / 30 = ?

  
  

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