Carr Industries Must Raise $100 Million on January 1,2012 to Finance

Essay

Carr Industries must raise $100 million on January 1,2012 to finance its expansion into a new market.The company will use the money to finance construction of four retail outlets and a distribution center.The stores are expected to open later this year.The CFO has come up with three alternatives for raising the money:
1)Issue $100 million of 8% nonconvertible debt due in 20 years.
2)Issue $100 million of 6% nonconvertible preferred stock (100,000 shares).
3)Issue $100 million of common stock (1 million shares).
The company's internal forecasts indicate the following 2012 year-end amounts before any option is chosen:
$\begin{array} { | l | r | } \hline \text { Sin millions } & \\\hline \text { Tatal debt } & 425 \\\hline \text { Total shareholders' equity } & 250 \\\hline \text { Net incane Far the year } & 10 \\\hline\end{array}$
Carr has no preferred stock outstanding but currently has 10 million shares of common stock outstanding.EPS has been declining for the past several years.Earnings in 2011 were $1 per share,which was down from $1.10 during 2010,and management wants to avoid another decline during 2012.One of the company's existing loan agreements requires a debt-to-equity ratio to be less than 2.Carr pays taxes at a 40% rate.
Required:
1.Assess the impact of each financing alternative on 2012 EPS and the year-end debt to equity ratio.
2.Which financing alternative would you recommend and why?