Assume that during 2007, Baker Mountain company had the opportunity to acquire additional assets at a price of $500 million. The additional assets were expected to increase the company's operating income by $80 million annually (to $386,679,000) for the foreseeable future. They could be financed either by selling stock or issuing debt.
Prepare a pro forma (projected) income statement for each financing alternative. Start with operating income. Compute pro forma return on equity under each alternative. Discuss whether Baker Mountain should finance the acquisition with debt or stock. Assume that debt could be issued at a 7% interest rate.
Operating Income $ 306,709.00
Interest Expense $ (55,528.00)
Income Taxes (40%) $ (100,460.00)
Net Income $ 150,691.00
Earnings per share (144.6 million per share $ 1.04
Total assets $ 3,297,390.00
Short Term borrowing $ 1,612.00
Current Portion of long-term debt $ 247.00
Total current liabilities $ 635,320.00
Long-term debt $ 673,588.00
Deferred income taxes $ 150,460.00
Other long-term liabilities $ 51,178.00
Total stockholders' equity $ 1,689,209.00