Question

sing location mang o n Hilltop Medical Goods is embarking on a massive expansion Assume plans call for opening 20 new stores during the next two years. Each one is scheduled to be 30% larger than the company's more items of inventory and with more elaborate displays. Management estimates that company operations will provide $10 million of the cash needed for expansion to Medical mutash from outsiders Click the icon to view information on raising the additional funds) Read the requirements the Requirement 1. Evaluate the tect the two financing amaties will have one 's net income and carings per share two years from now er the amounts to how the store bomow income and to show aming per share her the expansion New Begin by selecting the labels needed to analyze the effect of the motives on the propria com Round the EPS c on tod o balance, make sure to s enter the amounts to show the effect of the shares of stockmative Foramounts with a dollars instead of millions) Alternative 1 Alternative 2 More info Requirements this in the o ther by The board of director is considering of common to Doming o rby issuing an additional 500 000 before and the company has come $2.5 n common the m ore 500 000 whes of e 's 1. Evaluate the effect the two financing tomatives will have on income and comings per share wo years from now s anan ang the date and 2. Complete the meme common s e nded disadvantages of borrowing and of Which method of the would you recommend prive Done Print Done Choose from any list or entera

Answer 1

Solution: Amount in million Amount in million $2.50 $0.50 Particulars Current Year Net Income Growth in Net Income in Year 1 Total Net Income in Year 1 Growth in Net Income in Year 2 Total Net Income in Year 2 Case : 1 Company acquires entire $ 8.75 million by borrowing Year 1 in million Year 2 in million Particulars Net Income before interest and tax $3.00 $3.60 Less: Interest on issue of borrowing $0.61 $0.61 Income before Tax $2.39 $2.99 Tax 40% $0.96 $1.20 Net Income after Tax $1.43 $1.79 $3.00 $0.60 $3.60 Case: 2 Company issues 500,000 shares @ 13.50 Particulars Year 1 in million Year 2 in million Net Income before interest and tax $3.60 Less: Interest on issue of borrowing $0.14 only 2 million borrowing are taken remaing 6.75 million borrowings are through shares. Income before Tax $2.86 $3.46 Tax 40% $1.14 $1.38 Net Income after Tax $1.72 $2.08 $3.00 $0.14 Net Income is more when company issues 500,000 shares @ 13.50 then borrowings of $ 8.75 million. However, tax paid is more when raised capital through common stock. Inorder to have a savings on tax paid, the company prefer to raise capital through borrowings. The interest payment made on the borrowings, will be deducted from income before tax.