Non Stop Limited has grown rapidly during the past three years.

Non

Stop

Limited

has grown rapidly during the past

three

years. The company

is considering

to

raise $50 million

in order

to finance the company's operations as well as to

replace the

company's short

-

term debts.

Currently, the company has 20 million of ordinary shares

outstanding. The company's tax rate is 28%. The following are extracts of the company's latest

financial statements:

Balance Sheet

Current liabilities

$30,000,000

Ordinary shares, par $1

$20,000,000

Retained earnings

$

10,00

0,000

Total assets

$

60,00

0,000

Total claims

$

60,00

0,000

Income Statement

Earnings before interest and taxes

$15,000,000

Interest

$

4,5

0

0

,000

Earnings before taxes

$10,500,000

Taxes (28%)

$

2,940

,

0

00

Net income

$

7,560

,

0

00

The company's investment banker has assured the company that the following alternatives are

feasible (flotation costs will be ignored):

Alternative

1

:

Sell

ordinary shares

at

$

4

.

Alternative

2

:

Sell convertible bonds at an 8% coupon; immediately convertible into

200 ordinary shares for each $1,000

-

par

-

value bond

Alternative

3

:

Sell bonds at an 8% coupon, each $1,000

-

par

-

value bond carrying

200 warrants immediately exercisable into

ordinary share

s at 5 per share

at $5

per

share Based on the above information provided,

y

ou are required to answer the following questions:a)

Suppose the company will spend half of the funds raised to pay off the short

-

term

debts

and

the other

half to increase total assets. Construct the new

balanc

e sheet under each alternative

. For

Alternatives 2 and 3, show the

balance sheet

after conversion of the bo

nds or

exercise of the warrants

.ACTY 7290 Advanced Business Finance

Assignment

-

Semester

1, 2018

Page

6

b)

Assess the effect of capital raising on earnings per share of the company

under each alternative. Assume that earnings before interest and taxes

(EBIT) will be 25% of total assets

.

[

9

marks]

c

)

Assume that

Mr. Bill Ma

rks

own

ed

65% of the

company's

ordinary shares.

Suppose

he did not purchase

the comp

any's convertible bonds or bond with

warrant

s

.

Assess the effect of capital raising on

his

percentage ownership

under each alternative. W

hich alternative should

he

select?

Support your

answer with calculations and

discussion

.

[

1

7

marks]

d

)

What will be the

debt ratio (

t

otal liabil

ities

/

t

otal

a

ssets) under each

alternative?