Please consider the following data for the Hercules
Company:
Assets: $3 billion
Equity: $2 billion
Sales: $1.5 billion
EBIT: $300 million
Profit (bt) $200 million
Profit (at) $150 million
Payout ratio is: 30%
Number of common stock shares outstanding is: 50 million shares
a) How much interest is Hercules paying on this debt?
b What is Hercules Company’s current ROE & ROI (return on investment or return on assets)?
c) i) If Hercules were to float (sell) $500 million in bonds and use the proceeds to buy back 12.5 million common shares back, what would be the new ROE & ROI? Hint: What is the implied book/market price for a share of Hercules common stock? (Assume all else remains unchanged).
ii) If Hercules were to float (sell) $500 million in bonds and use the proceeds to buy new plant and equipment that would cause sales to increase to $2.5 billion with an increase in COGS of $800 million, what would be the new ROE & ROI? (Assume the tax rate & the interest 'rate' on debt remains unchanged.)
d) What are the sustainable growth rates for part b), c i) and c ii)?
b) c i) c ii) ____________