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Calculate Progressive’s times-interest-earned ratio

As the financial vice president of Progressive Media, you have the fol-

lowing information:

Next year’s expected net income after tax but before new financing

Sinking-fund payments due next year on existing debt Interest due next year on existing debt
Company tax rate
Common stock price, per share

Common shares outstanding

$50 million $17 million $18 million 35%

$25

20 million

  1. Calculate Progressive’s times-interest-earned ratio for next year as- suming the firm raises $50 million of new debt at an interest rate of 7 percent.
  2. Calculate Progressive’s times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal $8 million.
  3. Calculate next year’s earnings per share assuming Progressive raises the $50 million of new debt.
  4. Calculate next year’s times-interest-earned ratio, times-burden- covered ratio, and earnings per share if Progressive sells 2 million new shares at $20 a share instead of raising new debt.

Solution:

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