.You are CEO of a high-growth technology firm. You plan to raise $180m to fund an expansion by issuing either new shares or new debt. With the expansion, you expect earnings next year of $24m. The firm currently has 10m shares outstanding, with a price of $90 per share. Assume perfect capital markets. a. If you raise the $180m by selling new shares, what will the forecast for next year’s earnings per share be? b. If you raise the $180m by issuing new debt with an interest rate of 5%, what will the forecast for next year’s earnings per share be? c. What is the firm’s forward P/E ratio (i.e., the share price divided by forecasted earnings) if it issues equity? What is the firm’s forward P/E ratio if it issues debt? How can you explain the difference?
Q.You are CEO of a high-growth technology firm. You plan to raise $180m to fund an
expansion by issuing either new shares or new debt. With the expansion, you expect
earnings next year of $24m. The firm currently has 10m shares outstanding, with a price
of $90 per share. Assume perfect capital markets.
a. If you raise the $180m by selling new shares, what will the
earnings per share be?
b. If you raise the $180m by issuing new debt with an interest rate of 5%, what will
the forecast for next year’s earnings per share be?
c. What is the firm’s forward P/E ratio (i.e., the share price divided by forecasted
earnings) if it issues equity? What is the firm’s forward P/E ratio if it issues debt?
How can you explain the difference?
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