CFIN6
Chapter 12 Spreadsheet Problem
Capital Structure
Use the model in File C12 to work this problem.
Early next year, the Strasburg Company plans to raise a net amount of $270 million to finance new
The Strasburg Company
Balance Sheet as of December 31 ($ millions)
Current assets $ 900.00 Accounts payable $ 172.50
Net fixed assets 450.00 Notes payable to bank 255.00
Income Statement for Year Ended December 31 ($ millions)
Sales $2,475.00
Operating costs (2,227.50)
Earnings before interest and taxes (EBIT) (10%) $ 247.50
CFIN6
The probability distribution for annual sales is as follows:
Annual Sales
Probability ($ millions)
0.20 $2,250
a. Assuming that EBIT is equal to 10 percent of sales, calculate earnings per share under both the debt
financing and the stock financing alternatives at each possible level of sales. Then calculate expected
earnings per share (EPS) and σEPS under both debt and stock financing. Also, calculate the debt-to–
c. What would be the effect on the refinancing decision if the rate long-term debt fell to 5 percent or
rose to 20 percent, assuming that all long-term debt must be refinanced if new debt is issued? If
stock is issued, the old debt will remain outstanding at the existing interest rate.
d. Which financing method would you recommend if the net stock price (1) rose to $105 or (2) fell to
CFIN6
Alternative 1 Alternative 2
Sales Probability Sales Probability
$2,250 0.0 $ 0 0.3