Problem Statement: Hershey needs to raise $1Bn to build four new manufacturing plants outside the United States to implement their strategic plan. The Board of Directors and Executive Leadership team are evaluating how best to raise this capital. Complete an analysis to determine the best solution. Currently, Hershey has the following input for the analysis:
Interest Rate: 3%
Tax Rate: =taxes in 2014 / EBT = 459/1,306 = 35%
Stock Price (January 2015) $106
# of Shares Outstanding: 220Mn EBIT in 2014 was $1.3Bn so the team wants to evaluate options based on $1.0Bn and $2.0Bn. For the evaluation, they will consider 100% stock, 100% debt and 50/50 combination.
a. Prepare an EPS/EBIT analysis for Hershey using the above information.
b. Develop an EPS/EBIT chart based on the analysis completed in Part a.
c. In 2014, Hershey issued a dividend, $2.04/share. Update your analysis to show the impact of the dividend.
d. What recommendation would you give the Board on the source of the capital required?