Accounting
AHMED3
WritingAssignment21.xlsxOption 1
| Option 1: Traditional bond issue with a $30 million face value, stated rate of 2.5% and interest payments due semiannually. The debt matures in 10 years. The debt is expected to issue at par and the underwriter's is expected to charge $200,000 to take the issue to market. | Pro-forma EBIT, Net Income after tax, Basic and Diluted EPS given Option 1 for raising capital needed. | ||||||||||||
| Given | Solved | ||||||||||||
| N | 20 | Additional Information: The firm is a non-dividend paying firm (i.e., neither common nor preferred stockholders are paid a dividend). There are 2 million shares of common stock outstanding, this balance of outstanding common stock is expected to remain consistent over the 10 year period. Earnings before interest and taxes is expected to $12 million dollars in the first year with a 5% increase year over year. The tax rate is 21%. | |||||||||||
| I | 1.25% | ||||||||||||
| PMT | $ 375,000.00 | ||||||||||||
| FV | $ 30,000,000.00 | ||||||||||||
| PV | $30,000,000.00 | ||||||||||||
| Begin | 0 | ||||||||||||
| JE | Debit | Credit | Credit | Debit | Credit | Earnings before interest and taxes (EBIT) | Net Income after Interest and Taxes | ||||||
| Date | Int Expense | Payment | Amortization | Carrying Value | Issue Expense | Unamort. BIC | Basic EPS | Diluted EPS | |||||
| Period | 0 | $30,000,000.00 | |||||||||||
| Period | 1 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | ||||||
| Period | 2 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | $ 12,000,000.00 | $ 8,871,700.00 | $ 4.44 | $ - 0 | ||
| Period | 3 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | ||||||
| Period | 4 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | $ 12,600,000.00 | $ 9,345,700.00 | $ 4.67 | $ - 0 | ||
| Period | 5 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | ||||||
| Period | 6 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | $ 13,230,000.00 | $ 9,843,400.00 | $ 4.92 | $ - 0 | ||
| Period | 7 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | ||||||
| Period | 8 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | $ 13,891,500.00 | $ 10,365,985.00 | $ 5.18 | $ - 0 | ||
| Period | 9 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | ||||||
| Period | 10 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | $ 14,586,075.00 | $ 10,914,699.25 | $ 5.46 | $ - 0 | ||
| Period | 11 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | ||||||
| Period | 12 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | $ 15,315,378.75 | $ 11,490,849.21 | $ 5.75 | $ - 0 | ||
| Period | 13 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | ||||||
| Period | 14 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | $ 16,081,147.69 | $ 12,095,806.67 | $ 6.05 | $ - 0 | ||
| Period | 15 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | ||||||
| Period | 16 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | $ 16,885,205.07 | $ 12,731,012.01 | $ 6.37 | $ - 0 | ||
| Period | 17 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | ||||||
| Period | 18 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | $ 17,729,465.33 | $ 13,397,977.61 | $ 6.70 | $ - 0 | ||
| Period | 19 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | ||||||
| Period | 20 | $ 375,000.00 | $ 375,000.00 | $ 0.00 | $ 30,000,000.00 | $ 10,000.00 | $ 10,000.00 | $ 18,615,938.59 | $ 14,098,291.49 | $ 7.05 | $ - 0 | ||
Option 2
| Option 2: Convertible bonds issued with a $28 million face value, stated rate of 2.5% and interest payments due semi-annually. The debt matures in 10 years and the conversion price of the debt is $200. The expected issuance price of the debt is expected to be $30 million and the underwriter's is expected to charge $250,000 to take the issue to market. | Pro-forma EBIT, Net Income after tax, Basic and Diluted EPS given Option 2 for raising capital needed. | ||||||||||||
| Given | Solved | ||||||||||||
| N | 20 | Additional Information: The firm is a non-dividend paying firm (i.e., neither common nor preferred stockholders are paid a dividend). There are 2 million shares of common stock outstanding, this balance of outstanding common stock is expected to remain consistent over the 10 year period. Earnings before interest and taxes is expected to $12 million dollars in the first year with a 5% increase year over year. The tax rate is 21%. | |||||||||||
| I | 0.86% | ||||||||||||
| PMT | $ 350,000.00 | ||||||||||||
| FV | $ 28,000,000.00 | ||||||||||||
| PV | $30,000,000.00 | ||||||||||||
| Begin | 0 | ||||||||||||
| JE | Debit | Credit | Debit | Debit | Credit | Earnings before interest and taxes (EBIT) | Net Income after Interest and Taxes | ||||||
| Date | Int Expense | Payment | Amortization | Carrying Value | Issue Expense | Unamort. BIC | Basic EPS | Diluted EPS | |||||
| Period | 0 | $30,000,000.00 | |||||||||||
| Period | 1 | $ 257,922.96 | $ 350,000.00 | $ 92,077.04 | $ 29,907,922.96 | $ 12,500.00 | $ 12,500.00 | ||||||
| Period | 2 | $ 257,131.33 | $ 350,000.00 | $ 92,868.67 | $ 29,815,054.29 | $ 12,500.00 | $ 12,500.00 | $ 12,000,000.00 | $ 9,053,357.11 | $ 4.53 | $ 4.43 | ||
| Period | 3 | $ 256,332.90 | $ 350,000.00 | $ 93,667.10 | $ 29,721,387.20 | $ 12,500.00 | $ 12,500.00 | ||||||
| Period | 4 | $ 255,527.61 | $ 350,000.00 | $ 94,472.39 | $ 29,626,914.80 | $ 12,500.00 | $ 12,500.00 | $ 12,600,000.00 | $ 9,529,880.20 | $ 4.76 | $ 4.65 | ||
| Period | 5 | $ 254,715.39 | $ 350,000.00 | $ 95,284.61 | $ 29,531,630.19 | $ 12,500.00 | $ 12,500.00 | ||||||
| Period | 6 | $ 253,896.18 | $ 350,000.00 | $ 96,103.82 | $ 29,435,526.37 | $ 12,500.00 | $ 12,500.00 | $ 13,230,000.00 | $ 10,030,146.86 | $ 5.02 | $ 4.88 | ||
| Period | 7 | $ 253,069.94 | $ 350,000.00 | $ 96,930.06 | $ 29,338,596.31 | $ 12,500.00 | $ 12,500.00 | ||||||
| Period | 8 | $ 252,236.59 | $ 350,000.00 | $ 97,763.41 | $ 29,240,832.90 | $ 12,500.00 | $ 12,500.00 | $ 13,891,500.00 | $ 10,555,342.85 | $ 5.28 | $ 5.13 | ||
| Period | 9 | $ 251,396.07 | $ 350,000.00 | $ 98,603.93 | $ 29,142,228.97 | $ 12,500.00 | $ 12,500.00 | ||||||
| Period | 10 | $ 250,548.33 | $ 350,000.00 | $ 99,451.67 | $ 29,042,777.30 | $ 12,500.00 | $ 12,500.00 | $ 14,586,075.00 | $ 11,106,713.17 | $ 5.55 | $ 5.38 | ||
| Period | 11 | $ 249,693.30 | $ 350,000.00 | $ 100,306.70 | $ 28,942,470.60 | $ 12,500.00 | $ 12,500.00 | ||||||
| Period | 12 | $ 248,830.92 | $ 350,000.00 | $ 101,169.08 | $ 28,841,301.53 | $ 12,500.00 | $ 12,500.00 | $ 15,315,378.75 | $ 11,685,565.07 | $ 5.84 | $ 5.65 | ||
| Period | 13 | $ 247,961.13 | $ 350,000.00 | $ 102,038.87 | $ 28,739,262.66 | $ 12,500.00 | $ 12,500.00 | ||||||
| Period | 14 | $ 247,083.86 | $ 350,000.00 | $ 102,916.14 | $ 28,636,346.51 | $ 12,500.00 | $ 12,500.00 | $ 16,081,147.69 | $ 12,293,271.13 | $ 6.15 | $ 5.94 | ||
| Period | 15 | $ 246,199.04 | $ 350,000.00 | $ 103,800.96 | $ 28,532,545.56 | $ 12,500.00 | $ 12,500.00 | ||||||
| Period | 16 | $ 245,306.62 | $ 350,000.00 | $ 104,693.38 | $ 28,427,852.18 | $ 12,500.00 | $ 12,500.00 | $ 16,885,205.07 | $ 12,931,272.53 | $ 6.47 | $ 6.23 | ||
| Period | 17 | $ 244,406.53 | $ 350,000.00 | $ 105,593.47 | $ 28,322,258.70 | $ 12,500.00 | $ 12,500.00 | ||||||
| Period | 18 | $ 243,498.69 | $ 350,000.00 | $ 106,501.31 | $ 28,215,757.40 | $ 12,500.00 | $ 12,500.00 | $ 17,729,465.33 | $ 13,601,082.48 | $ 6.80 | $ 6.54 | ||
| Period | 19 | $ 242,583.06 | $ 350,000.00 | $ 107,416.94 | $ 28,108,340.45 | $ 12,500.00 | $ 12,500.00 | ||||||
| Period | 20 | $ 241,659.55 | $ 350,000.00 | $ 108,340.45 | $ 28,000,000.00 | $ 12,500.00 | $ 12,500.00 | $ 18,615,938.59 | $ 14,304,289.83 | $ 7.15 | $ 6.87 | ||
Option 3
| Option 2: 28,000 $1000 bonds each with a detachable warrant are issued with a $28 million face value, stated rate of 2.5% and interest payments due semi-annually. The debt matures in 10 years. The bonds without the warrants would issue at face value and the underwriter's is expected to charge $300,000 to take the issue to market. The exercise price for each warrant is $14. | Pro-forma EBIT, Net Income after tax, Basic and Diluted EPS given Option 2 for raising capital needed. | ||||||||||||||
| Given | Solved | ||||||||||||||
| N | 20 | Additional Information: The firm is a non-dividend paying firm (i.e., neither common nor preferred stockholders are paid a dividend). There are 2 million shares of common stock outstanding, this balance of outstanding common stock is expected to remain consistent over the 10 year period. Earnings before interest and taxes is expected to $12 million dollars in the first year with a 5% increase year over year. The stock price is $11 per share in the first year and is expected to increase 4% year over year. The tax rate is 21%. | |||||||||||||
| I | 1.25% | ||||||||||||||
| PMT | $ 350,000.00 | ||||||||||||||
| FV | $ 28,000,000.00 | ||||||||||||||
| PV | $28,000,000.00 | ||||||||||||||
| Begin | 0 | ||||||||||||||
| JE | Debit | Credit | Credit | Debit | Credit | Earnings before interest and taxes (EBIT) | Net Income after Interest and Taxes | ||||||||
| Date | Int Expense | Payment | Amortization | Carrying Value | Issue Expense | Unamort. BIC | Stock Price | Strike Price | Basic EPS | Diluted EPS | |||||
| Period | 0 | $28,000,000.00 | |||||||||||||
| Period | 1 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | ||||||||
| Period | 2 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | $ 12,000,000.00 | $ 8,903,300.00 | $ 11.00 | $ 14.00 | $ 4.45 | $ 4.47 | ||
| Period | 3 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | ||||||||
| Period | 4 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | $ 12,600,000.00 | $ 9,377,300.00 | $ 11.44 | $ 14.00 | $ 4.69 | $ 4.70 | ||
| Period | 5 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | ||||||||
| Period | 6 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | $ 13,230,000.00 | $ 9,875,000.00 | $ 11.90 | $ 14.00 | $ 4.94 | $ 4.95 | ||
| Period | 7 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | ||||||||
| Period | 8 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | $ 13,891,500.00 | $ 10,397,585.00 | $ 12.37 | $ 14.00 | $ 5.20 | $ 5.21 | ||
| Period | 9 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | ||||||||
| Period | 10 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | $ 14,586,075.00 | $ 10,946,299.25 | $ 12.87 | $ 14.00 | $ 5.47 | $ 5.48 | ||
| Period | 11 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | ||||||||
| Period | 12 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | $ 15,315,378.75 | $ 11,522,449.21 | $ 13.38 | $ 14.00 | $ 5.76 | $ 5.76 | ||
| Period | 13 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | ||||||||
| Period | 14 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | $ 16,081,147.69 | $ 12,127,406.67 | $ 13.92 | $ 14.00 | $ 6.06 | $ 6.06 | ||
| Period | 15 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | ||||||||
| Period | 16 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | $ 16,885,205.07 | $ 12,762,612.01 | $ 14.48 | $ 14.00 | $ 6.38 | $ 6.38 | ||
| Period | 17 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | ||||||||
| Period | 18 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | $ 17,729,465.33 | $ 13,429,577.61 | $ 15.05 | $ 14.00 | $ 6.71 | $ 6.71 | ||
| Period | 19 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | ||||||||
| Period | 20 | $ 350,000.00 | $ 350,000.00 | $ - 0 | $ 28,000,000.00 | $ 15,000.00 | $ 15,000.00 | $ 18,615,938.59 | $ 14,129,891.49 | $ 15.66 | $ 14.00 | $ 7.06 | $ 7.05 | ||
