FINANCING

ALTERNATIVE
Fahri Tsani Baharudin Armanyah (18.05.52.0096)
Aulia Rakhma Larasati Putri (18.05.52.0120)
Maydiani Putri Herlina Sari (18.05.52.0123)
Riski Amaliya (18.05.52.0127)
• Kelompok 7 presentasi problems 13-13.
The Severn Company: Balance Sheet as of December 31, 2014
(millions of dollars)
__________
Current assets $900.00
Net fixed assets 450.00
___________
Total assets $1,350.00

Accounts payable $172.50

Notes payable to bank $255.00
Other current liabilities $255.00
__________
Total current liabilities $652.50
Long-term debt (10%) 300.00
Common Stock, ($3 par) 60.00
Retained earnings 337.50
___________
Total liabilities and equity $1,350.00
The Strasburg Company: Income Statement for year ended December 31, 2010 (millions of do
Sales $2,475.00
Operating costs (2,227.50)
__________
Earnings before interest and taxes $247.50
Interest on short-term debt (15.00)
Interest on long-term debt (30.00)
___________
Earnings before taxes (EBT) $202.50
Taxes (40%) (81.00)
___________
Net income $121.50

The probability distribution for annual sales is as follows:

Probability Annual Sales (millions of dollars)
0.30 $2,250
0.40 2,700
0.30 3,150
• Use of debt ($ millions):
• 
• Probability 0.3 0.4 0.3
• Sales $2,250.0 $2,700.0 $3,150.0
• EBIT (10%) 225.0 270.0 315.0
• Interest* ( 77.4) ( 77.4) ( 77.4)
• EBT 147.6 192.6 237.6
• Taxes (40%) ( 59.0) ( 77.0) ( 95.0)
• Net income $ 88.6 $ 115.6 $ 142.6
• 
• Earnings per share
• (20 million shares) $ 4.43 $ 5.78 $ 7.13
• Interest on debt = ($270 x 0.12) + Current interest expense
• = $32.4 + ($15 + $30) = $77.4
• 
• Expected EPS = (0.30)($4.43) + (0.40)($5.78) + (0.30)($7.13)
• = $5.78 if debt is used.

2 2 2
 Debt  0.30($4.43- $5.78)  0.40($5.78- $5.78) 0.30($7.13- $5.78)
 1.0935  $1.05

• Expected Sales = 0.3($2,250) + 0.4($2,700) + 0.3($3,150) = $2,700.

At Sales = $2,700, EBIT = $270.
 E(EBIT) $270
E  TIE Debt  = = = 3.49 
I $77.40
• Debt/Assets = ($652.50 + $300 + $270)/($1,350 + $270) = 75.5%.
• Use of stock (Millions of dollars):
• Probability 0.3 0.4 0.3
• Sales $2,250.0 $2,700.0 $3,150.0
• EBIT 225.0 270.0 315.0
• Interest (45.0) (45.0) (45.0)
• EBT 180.0 225.0 270.0
• Taxes (40%) (72.0) (90.0) (108.0)
• Net income $ 108.0 $ 135.0 $ 162.0
• Earnings per share
• (24.5 million shares)* $ 4.41 $ 5.51 $ 6.61
*Number of shares = ($270 million/$60) + 20 million
= 4.5 million + 20 million = 24.5 million.
 
EPSEquity= (0.30)($4.41) + (0.40)($5.51) + (0.30)($6.61) = $5.51.
 
 Equity  0.30)($4.41 - $5.51)2  0.40($5.51- $5.51)2  0.30($6.61- $5.51)2
 0.7260  $0.85
$270
E(TIEEquity) = = 6.00 
$45
• Debt/Assets = ($652.50 + $300)/($1,350 + $270) = 58.8%