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Analyzing Financial Data ACC/230 Marvin Washington July 31, 2012 Christopher Fountain Laurel Street, president of Uvalde Manufacturing Inc. is preparing a proposal to present to her board of directors regarding a planned plant expansion that will cost $10 million. At issue is whether the expansion should be financed with debt (a long-term note at First National Bank of Uvalde with an interest rate of 15%) or through the issuance of common stock (200,000 shares at $50 per share). Current Equity Financing Debt Financing Debt Financing 40,000,000 40,000,000 50,000,000 Equity Financing 50,000,000 60,000,000 50,000,000 Sales Revenue 100,000,000 Cost of good sold 65,000,000 Gross profit 35,000,000 Operating expenses 20,000,000 Operating profit 15,000,000 18,000,000 18,000,000 Interest expense 4,800,000 4,800,000 6,300,000 Earnings before taxes 10,200,000 13,200,000 11,700,000 Income tax expenses 4,080,000 5,280,000 4, 680,000 Net income 6,120,000 7,920,000 7,020,000 #of shares Outstanding 800,000 1,000,000 800,000 a) Debt Ratio 0.44 0.40 0.50 Times Interest Earned 3.13 3.75 2.86 Earnings per share $7.65 $7.92 $8.78 Financial Leverage Index 1.47 1.36 1.54 b) Some of the factors the firm might consider are: The return that the common stock shareholders are expecting on the shares that they hold any growth in dividends that the shareholders expect from the company’s shares. Excessive debt financing involves interest liabilities, which if not met could cause bankruptcy. Minimum earnings per share or P/E ratios that the company may have to maintain according to market expect marketability. The availability of debt financing from lenders. Equity financing could affect the required return by investors, so the firm should consider this effect. The length of time for which the long-term loan is desired. Ideally, it should match the duration of the projected whether the loan to be assumed is based on a fixed rate or allows the bank to reconsider interest rates.