Q. Determine Earnings per share?
Current earnings per share = 100 × (4550 - 225)/ 5000 = 86.5 cents
Earnings per share after one year = 100 × (4508 - 225)/ 5000 = 85.7 cents
Earnings per share is see as a key accounting ratio by investors and the stock market and the decrease will not be welcomed. Though the decrease is quiet small and future growth in earnings should quickly eliminate it.
The analysis point to that an issue of new debt has a negative effect on the company's financial position at least initially. There are additional difficulties in considering a new issue of debt. An existing non-current assets are security for the existing 10% loan notes as well as may not available for securing new debt which would then need to be secured on any new non-current assets purchased. These are probable to be lower in value than the new debt and so there may be insufficient security for a new loan note issue. Redemption or else refinancing would also pose a problem with Droxfol Co needing to redeem or refinance $10 million of debt after both eight years and ten years. Ten years may consequently be too short a maturity for the new debt issue.
An equity issue must be considered and compared to an issue of debt. This could be in the type of a rights issue or an issue to new equity investors.