Ferris Manufacturing is all equity financed. Current financial data for Ferris is provided in the table below for three states of nature, which correspond with three levels of sales
The CFO of Ferris, Cameron Fry, is considering a change in capital structure. In particular, he is thinking about borrowing $5,000. He will borrow the money by issuing perpetual bonds with a face value of $5,000 and a coupon rate of 5%. The borrowed money will be used to repurchase shares at $28.57 per share. Repurchased shares will be cancelled. Taxes are 0%. What are Earnings per Share (EPS) in each state of nature if Ferris borrows the money?
Ferris Manufacturing
Bad Normal Good
EBIT $500 $1,000 $1,500
Interest 0 0 0
Pre-Tax Income 500 1,000 1,500
Taxes (0%) 0 0 0
Net Income 500 1,000 1,500
# Shares 500 500 500
EPS $1.00 $2.00 $3.00
A) Bad: $1.00; Normal: $2.00; Good: $3.00
B) Bad: $0.77; Normal: $2.31; Good: $3.85
C) Bad: $0.50; Normal: $1.50; Good: $2.50
D) Bad: $1.54; Normal: $3.08; Good: $4.62
E) Bad: $1.25; Normal: $2.25; Good: $4.15
B
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In considering whether a company should invest in debt or equity securities of another company, which of the following statements is incorrect?
A) The company wants to make the best use of its excess cash to generate investment income. B) Investment income consists of interest earned from equity securities and dividends earned from debt investments. C) Investment income includes increases in the market value of debit or equity securities. D) The excess cash that can be invested could be the result of temporary or seasonal business fluctuations.
The advantage of using available published reports as a source of market information is that it is
customized and inexpensive. Indicate whether the statement is true or false