Paper

Analyzing Financial Data
ACC/230
Marvin Washington
July 31, 2012
Christopher Fountain

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).

Current Equity Financing Debt Financing
Debt Financing   40,000,000 40,000,000 50,000,000
Equity Financing 50,000,000 60,000,000 50,000,000

Sales Revenue 100,000,000
Cost of good sold 65,000,000
Gross profit 35,000,000
Operating expenses 20,000,000
Operating profit 15,000,000 18,000,000 18,000,000
Interest expense 4,800,000 4,800,000 6,300,000
Earnings before taxes 10,200,000 13,200,000 11,700,000
Income tax expenses 4,080,000 5,280,000 4, 680,000
Net income 6,120,000 7,920,000 7,020,000

#of shares Outstanding 800,000 1,000,000 800,000




a)
Debt Ratio 0.44 0.40 0.50
Times Interest Earned 3.13 3.75 2.86
Earnings per share $7.65 $7.92 $8.78
Financial Leverage Index 1.47 1.36 1.54


b) Some of the factors the firm might consider are:
The return that the common stock shareholders are expecting on the shares that they hold any growth in dividends that the shareholders expect from the company‚Äôs shares. Excessive   debt financing involves interest liabilities, which if not met could cause bankruptcy. Minimum earnings per share or P/E ratios that the company may have to maintain according to market expect marketability. The availability of debt financing from   lenders. Equity financing could affect the required return by investors, so the firm should consider this effect. The length of time for which the long-term loan is desired. Ideally, it should match the duration of...