ORNE Corporation plans to raise $2 million to pay off its existing short-term
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Answer must be in Excel.
ORNE Corporation plans to raise $2 million to pay off its existing short-term bank loan of $600,000 and to increase total assets by $1,400,000. The bank loan bears an interest rate of 10percent.The company’s president owns57.5% percent of the 1,000,000 shares of common stock and wishes to maintaincontrol of the company. The company’s tax rate is 30 percent. Balance sheet information is shownbelow.The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share.
Current Balance Sheet Current Liabilities $900,000 Common Stock, Par $1 1,000,000 Retained earnings 700,000 Total Assets $2,600,000 Total claims $2,600,000
a. Show the new balance sheet under bothalternatives.For Alternatives 2, show the balance sheet after exercise of the warrants.
b. Calculate the president’s ownership position for both alternatives. He doesn’t buy any of the additional shares.
c. Calculate earnings per share for both alternatives, assuming EBIT is 10 percent of total assets.
d. Calculatethe debt ratio under both alternatives
e. Which alternative do you recommend and why?
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