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Uvalde Manufacturing Inc




6.6. Laurel Street, president of Uvalde Manufacturing Inc. is preparing a proposal to present to;her board of directors regarding a planned plant expansion that will cost $10 million.;At issue is whether the expansion should be financed with debt (a long-term note at First;National Bank of Uvalde with an interest rate of 15%) or through the issuance of common;stock (200,000 shares at $50 per share).;Uvalde Manufacturing currently has a capital structure of;Debt (12% interest) 40,000,000;Equity 50,000,000;The firm?s most recent income statement is presented next;Sales $100,000,000;Cost of goods sold 65,000,000;Gross profit 35,000,000;Operating expenses 20,000,000;Operating profit 15,000,000;Interest expense 4,800,000;Earnings before tax 10,200,000;Income tax expense (40%) 4,080,000;Net income $ 6,120,000;Earnings per share (800,000 shares) $ 7.65;Laurel Street is aware that financing the expansion with debt will increase risk but could;also benefit shareholders through financial leverage. Estimates are that the plant expansion;will increase operating profit by 20%.The tax rate is expected to stay at 40%.Assume;a 100% dividend payout ratio.;Required;a. Calculate the debt ratio, time interest earned, earnings per share, and the financial;leverage index under each alternative, assuming the expected increase in operating;profit is realized.;b. Discuss the factors the board should consider in making a decision.


Paper#26995 | Written in 18-Jul-2015

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