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The senior management team of your firm is investigating the financial implications of a change...

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Accounting

The senior management team of your firm is investigating the financial implications of a change to the companys capital structure. The firm currently uses a combination of long-term debt and internal common equity to finance its new asset requirements. Senior management, concerned about economic events that may make borrowing difficult to obtain, is considering two options for Q9. First, borrow $4.5 million in two-year debt, three-year debt and ten-year bonds at an average cost of 4.0%. Alternatively, issue an additional 900K shares of new common stock. The team has asked you to prepare a summary report in the form of a double-spaced memo, outlining the major implications of the proposed change in strategy.

Table 1Current versus Proposed Capital Structure

Debt

Common Stock

Absolute Change

Percent Change

Weight of Debt

13.94%

5.44%

8.49%

(60.95%)

Weight of Equity

?

?

?

?

WACC (Annual)

?

?

?

?

Available to Common

?

?

?

?

ROE (Annual)

?

?

?

?

ROA (Annual)

?

?

?

?

EPS

?

?

?

?

MV for Q9

$20.8 million

$30.36 million

$9.56 million

45.98%

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