On 1 March 2013, Zentique Inc. reported its financial results, an extract of the 2012 balance sheet is shown below:
|
(in thousands of dollars)
|
Financial Structure
|
|
Liabilities
|
|
|
Current liabilities
|
|
|
Accounts payable
|
6,230,000
|
|
Short/current debt
|
0
|
|
Other current liabilities
|
3,069,000
|
|
Total current liabilities
|
9,299,000
|
|
Long-term debt
|
0
|
|
Other long-term liabilities
|
1,516,000
|
|
Long-term liabilities
|
1,516,000
|
|
Stockholder equity
|
14,532,000
|
|
Total
|
25,347,000
|
Moreover, the firm's 2012 income statement reported earnings of S3.496 billion with no interest expense:
|
(5 thousands)
|
2012
|
2011
|
2010
|
|
Earnings before interest and taxes
|
5,008,000
|
2,818,000
|
1,815,000
|
|
Interest expense
|
0
|
0
|
0
|
|
Income before tax
|
5,008,000
|
2,818,000
|
1,815,000
|
|
Income tax expense
|
(1 512 000)
|
(829,000)
|
(480,000)
|
|
Net income
|
3.496.000
|
1,989,000
|
1,335,000
|
If Zentique's management were considering he possibility of using debt financing for the first time, it might look at Hewlett-Packard Corporation (HPQ) as a benchmark firm for comparison purposes. HPQ used debt financing as shown on the following balance sheet and income statement:
Hewlett-Packard Corporation Balance Sheet 2012
|
(in thousands of dollars)
|
Financial Structure
|
|
Liabilities
|
|
|
Current liabilities
|
|
|
Accounts payable
|
25,822,000
|
|
Short/current debt
|
3,186,000
|
|
Other current liabilities
|
10,252,000
|
|
Total current liabilities
|
39,260,000
|
|
Long-term debt
|
4,997,000
|
|
Other long-term liabilities
|
5,916,000
|
|
Long-term liabilities
|
10,913,000
|
|
Stockholder equity
|
38,526,000
|
|
Total
|
88 699,000
|
Hewlett-Packard Corporation Income Statement
|
(5 thousands)
|
2012
|
2011
|
2010
|
|
Earnings before interest and taxes
|
9,466,000
|
7,440,000
|
3,759,000
|
|
Interest expense
|
(289,000)
|
(249,000)
|
(216,000)
|
|
Income before tax
|
9,177,000
|
7,191,000
|
3,543,000
|
|
Income tax expense
|
(1,913,000)
|
(933,000)
|
(1,145,000)
|
|
Net income
|
7,264,000
|
6,198,000
|
2,398,000
|
(a) Analyse the capital structure of I Icy. lot-Packard using both the debt ratio and interest-bearing debt ratio.
(b) Suppose Zentique has decided to change its capital structure by issuing debt financing and use the proceeds to repurchase some of its shares of stock from the open market. What fraction of the firm's 2.47 billion shares does the firm need to repurchase so as to achieve its interest bearing debt ratio equal to that of Hewlett-Packard for 2012?
If Zentique had carried out the above transaction at the start of 2012 by issuing bond with an 8% interest rate, analyse the effect of the above capital restructuring will have on its earnings per share.
(c) Assess the proposed change of capital structure for Zentique. Do you think it makes good financial sense? Why or why not?