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The Strasburg Company
Balance Sheet as of December 31 ($ millions)
Current assets	$900.00	Accounts payable	$172.50
Net fixed assets	450	Notes payable to bank	255
		Other current liabilities	225
		Total current liabilities	$652.50
		Long-term debt (10%)	300
		Common stock, $3 par	60
			Retained earnings	337.5
Total assets	$1,350.00	Total liabilities and equity	$1,350.00
Income Statement for Year Ended December 31 ($ millions)
Sales	$2,475.00
Operating costs	-2,227.50
Earnings before interest and taxes (EBIT) (10%)	$247.50
Interest on short-term debt	-15
Interest on long-term debt	-30
Earnings before taxes (EBT)	$202.50
Taxes (40%)	-81
Net income $	$121.50
The probability distribution for annual sales is as follows:
	Annual Sales
Probability	($ millions)
0.2	$2,250
0.6	2,700
0.2	3,150
A. Now assume that if new debt is sold, the old long-term debt will not remain outstanding; rather both the old debt and the new debt will be refinanced at the new long-term interest rate of 12 percent. If stock is issued, the old debt will remain outstanding at the existing interest rate. What effect does this change have on the decision to refinance? B What would be the effect on the refinancing decision if the rate long-term debt fell to 5 percent or rose to 20 percent, assuming that all long-term debt must be refinanced if new debt is issued? If stock is issued, the old debt will remain outstanding at the existing interest rate. C. Which financing method would you recommend if the net stock price (1) rose to $105 or (2) fell to $30? D. Assume that all long-term debt is refinanced at 12 percent if new debt is issued. If stock is issued, the old debt will remain outstanding at the existing interest rate.

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