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Eastern Inc Is in Need of $5,000,000 to Expand Their

question 98

Essay

Eastern Inc is in need of $5,000,000 to expand their operations into Western Canada.The projected income statement for the first year of operation after the expansion is shown below.It does not include any of the financing costs.A projected partial balance sheet after the expansion, but before the addition of the new financing, has also been prepared.Eastern is considering three alternatives to raise the $5,000,000.
i) Borrow the full amount from the bank in the form of a long-term note.Interest would be 8% per annum, and repayments would start in two years.
ii) Issue common shares; the recent average market price has been $50.For the last three years they have paid annual dividends of $0.10 per share.
iii) Issue cumulative preferred shares with a $2 annual dividend at $80 per share. Eastern Inc
Projected Income Statement
$\begin{array}{lr}\text { Revenues } & \$ 7,500,000 \\\text { Expenses } & 5,000,000 \\\text { Income tax expense } & \$ 1.750,000 \\\text { Net income } & \$ 15000\end{array}$ $Eastern Inc is in need of $5,000,000 to expand their operations into Western Canada.The projected income statement for the first year of operation after the expansion is shown below.It does not include any of the financing costs.A projected partial balance sheet after the expansion, but before the addition of the new financing, has also been prepared.Eastern is considering three alternatives to raise the $5,000,000. i) Borrow the full amount from the bank in the form of a long-term note.Interest would be 8% per annum, and repayments would start in two years. ii) Issue common shares; the recent average market price has been $50.For the last three years they have paid annual dividends of $0.10 per share. iii) Issue cumulative preferred shares with a $2 annual dividend at $80 per share. Eastern Inc Projected Income Statement \begin{array}{lr} \text { Revenues } & \$ 7,500,000 \\ \text { Expenses } & 5,000,000 \\ \text { Income tax expense } & \$ 1.750,000 \\ \text { Net income } & \$ 15000 \end{array} Required: A) Calculate the net income for Eastern under each of the three alternatives. B) Calculate the EPS and ROE for Eastern under each of the three alternatives.Use year-end balances in your calculations. C) Which alternative would you recommend to them? Support your recommendation.$ Required:
A) Calculate the net income for Eastern under each of the three alternatives.
B) Calculate the EPS and ROE for Eastern under each of the three alternatives.Use year-end balances in your calculations.
C) Which alternative would you recommend to them? Support your recommendation.

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Definitions:

Intake Session

An initial meeting, often in therapy or counseling settings, aimed at assessing a client's needs and establishing a plan of action.

Peer Monitoring

The process of observing peers' activities or performance, often in a professional or educational setting, to ensure standards are met and to provide feedback.

Informal

Characterizing interactions or activities that are casual, unstructured, and not governed by formal rules, often marked by a relaxed atmosphere.

Consultation Group

A gathering of professionals who come together to discuss, advise, and support one another on matters related to their field of expertise.