# Calculating shares of stock, earnings per share, and market price of common stock.

I'm not sure exactly how to get started. The more I read into it, the more ways I find to come up with solutions and they are all different. Any help would be greatly appreciated. Here is the problem.

A corporation is planning to expand its business and needs \$30,000,000. The company believes that a 12-year term loan can be negotiated with a bank at an annual rate of 10%. Alternatively, an investment banking firm has indicated that it is willing to underwrite a common stock issue for a spread of 5%. Wheeler currently has 2,000,000 common shares outstanding.

(a) If new shares of stock can be sold for \$30 per share, how many shares of stock must be sold to net the \$30,000,000 that the corporation needs, assuming out-of-pocket expenses of \$600,000?

(b) If earnings before interest and taxes increase to \$10,000,000 and the applicable tax rate is 34%, what would the earnings per share be under each financing alternative? (Assume annual interest before financing of \$1,000,000)

(c) Compute the approximate market price of the common stock if the P/E ratio remains at 10 if new stock is issued but falls to 9.5 if the money is borrowed

#### Solution Preview

...at the corporation needs, assuming out-of-pocket expenses of \$600,000?

30(1 - 0.05)xQ - 600,000 = 30,000,000
28.5Q = 30600000
Q = 1,073,684 shares

(b) If earnings before interest and taxes increase to \$10,000,000 and the applicable tax rate is 34%, what would the earnings per share be under each financing alternative? (Assume annual interest before financing of \$1,000,000)

12-year term loan

Earnings before interest and taxes 10,000,000
Less: Interest expense ...