Let say PEX has a debt-to equity ratio of 1.0 and wishes to maintain that ratio even if the firm expands or downsizes. Currently, the stock sells for $25 and there are 300,000 shares outstanding. The existing debt has an annual coupon of $120 per $1,000 bond. Given a current cash flow (before interest and taxes) of $1,650,000 and a tax rate of 40%.
5. Calculate earnings per share for PEX.
6. A $5 million expansion of PEX will require a stock and bond issue (assume bonds sell at $1,000 par).
a) How many shares of stock and how many bonds will be required to finance the expansion?
b) What level will the cash flow need to maintain PEX's current level of earnings per share?