Posted: April 13th, 2023
Accounting
A company is in need of $30 million in new capital financing to be used to expand the consumer market of the company. The CEO asks you to provide a comparison of three different options: a traditional debt issue, a convertible debt issue, and a debt issue with detachable warrants. Using the excel file provided (link below), evaluate each of the three options. In your paper, compare and contrast elements of each debt issue that you deem relevant to the financing decision. Items that are relevant to the financing decision can include, but not limited to, financial ratios, balance sheet effects, and/or income statement effects (i.e., return on equity, leverage, earnings, cash flows, earnings per share, diluted earnings per share, etc.). Using supporting arguments and a supporting data visualization make the case for one of the three financing options (there is not a right or wrong answer but your arguments need to be supported accurately).
Details for each potential debt issue are contained in the above excel file and are summarized below:
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Option 1 – Traditional Debt Issue – Issue $30 million in bonds with a stated rate of 2.5% due in 10 years. Interest is paid semi-annually, the debt is expected to issue at face value, and the underwriter will charge $200,000 to take the issue to market.
Option 2 – Convertible Bond Issue – Issue $28 million in convertible bonds with a stated rate of 2.5% and conversion price of $200. Interest is paid semi-annually, the issue price is expected to be $30 million, and the underwriter will charge $250,000 to take the issue to market.
Option 3 – Lump sum sale of bonds with detachable warrants – Issue $28 million in $1,000 2.5% bonds each with a detachable warrant. The exercise price for each warrant is $14. Interest is paid semi-annually, the bonds would issue at face value without the detachable warrants, and the underwriter will charge $300,000 to take the issue to market.
Excel files with 3 sheets is attached to be used for comparaison.
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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%.
2 pages max, double spaced with 1 inch margin
Data visualization such as graph, chart, etc. are welcome.
Thank you in advance.
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