Posted by Mike on Saturday, March 31, 2012 at 4:38pm.
Weighted Average Cost of Capital)As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm's present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm's capital structure as follows:
Source of Capital Market Values
Preferred stock $2,300,000
Common stock $6,300,000
To finance the purchase ranch Manufacturing will be selling 10 year bonds paying 7.5% at the market price of $1,054. Preferred stock paying $1.91 dividend can be sold for $24.23 Common stock for Ranch Manufacturing is currently selling for $54.49 per a share and the firm paid a $3.02 dividend last year. Dividends are expected to continue growing at a rate of 5.2% per a year into the indefinite future. If the firm's tax rate is 30%, what discount rate should you use to evaluate the equipment purchase?
Ranches Manufacturing WACC is what %? (Round to 3 decimal places)
5.(EBIT EPS Analysis) Abe Forrester and three of his friends from college have interested a group venture capitalists in backing their business idea. The proprosed opertation would consist of a series of retail outlets to distributie and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed:
-Plan A is an all-common-equity structure in which 2.2 million dollars would be raised by selling 84,000 shares of common stock.
-Plan B would involve issuing $1.1 million dollars in long-term bonds w/ an effective interest rate of 11.8% plus $1.1 million would be raised by selling 42,000 shares of common stock. The debt funds raised under plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanant part of the firm's capital structure.
Abe and his partners plan to use a 35% tax rate in their analysis, and they have hired you on a consulting basis to do the following:
A.) Find the EBIT indifference level associated w/ the two financing plans.
B.) Prepare a pro forma income statement for the EBIT level solved for in Part. A. that shows that EPS will be the same regardless whether Plan A or B is chosen.
The Ebit indifference level associated with the financial plan is what$ ? (Round to nearest dollar)
6.(Ebit EPS Analysis) Three recent graduates of the computer science program at the Univers
Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone.Initially, the corporation will operate in the southern region of Tennessee, Georgia, North Carolina and South Carolina. A small group of private investors in the Atlanta, Georgia are interested in financing the startup company and two financing plans have been put forth into consideration.
The first plan(A) is an all common equity capital structure $2.1 million dollars would be raised by selling common stock at $10 per common share.
Plan B would involve the use of financial leverage. $1.1 million would be raised by selling bonds with an effective interest rate of 10.7% and the remaining 1.0 mill would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be a permanent part of the firms capitalization, so no fixed date is needed for the analysis. A 30% tax rate is deemed appropriate for the analysis.
A.Find the ebit indifference rate associated with the two financing problems
B.A detailed financial analysis of the firms prospects suggests that the long term EBIT will be above $323,000 annually.Taking this into consideration, which plan will generate the higher EPS?
The ebit indifference level associated with the two financial plans is what $? (Round to nearest dollar)
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