At the beginning of year 1, thefirm needs to raise $10M of equity capital to expand.

Assumethe following data:

• Projected     year 1 Income, post-financing                     = $4M
  
• Shares     outstanding, pre financing                          = 4M
  
• The company pays no     dividends, the interest rate is 5%
  

       and volatility is35%

• Annual     Rate of earnings growth - after year 1              =20%     
  

             (Note this is not necessarily therate of

              EPS growth)

• Assumed PE multiple  on earnings for equity valuation   =     20X next years earnings.
  
• Tax rate                                             =40%
  

There are three financing approaches

• Sell     $10M of straight equity
  
• Sell     $10M of 5-year at-the-money warrants
  
• Sell     $10M of straight bonds. The bonds have an interest rate of 8%.
  

Required:

For each of the first 5 years, compute projected EPS undereach financing approach.

Each year, you will need to compute the following:

• Enterprise     value (based on earnings growth)
  
• The stock     plus warrant value (using Black-Scholes).
  
• Note     that the stock, debt, and warrant values combined must equal enterprise     value.
  
• When     the options are first issued, they must have a value of $10M.