4) Your supervisor has asked you to compute the discount rate for new packaging equipment. you have determined the market value of the firm's capital structure as follows; to finance the purchase the firm will sell 10 yr bonds paying 6.6% per year at the market price of $1068 preferred stock paying 2.07 per dividend can be sold for 24.88 common stock is currently selling for $55.32 per share and the firm paid a $3.09 dividend last year. Dividends are expected to continue growing at a rate of 4.7 % per year into the indefinite future. If the tax rate is 30% what discount rate should you use to evaluate the equipment purchase? Source of Capital Market Values Bonds $3,700,000 Preferred stock $2,500,000 Common stock $5,600,000 5)Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute 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 $1.2 million dollars would be raised be selling 84,000 shares of common stock. • Plan B would involve issuing $1.2 million dollars in long-term bonds with an effective interest rate of 11.6% plus $1.0 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 permanent part of the firm's capital structure. Abe and his partners plan to use a 40% 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 with 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. 6) 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 area is interested in financing the startup company and two financing plans have been put forth for consideration: The first plan (plan A) is an all-common-equity capital structure. 2.5 million dollars would be raised by selling common stock at $20 per common share - Plan B would involve the use of financial leverage. 1.3 million dollars would be raised by selling bonds with an effective interest rate of 10.5% (per annum) and the remaining 1.2 million would be raised by selling common stock at the $20 price per share. The use of financial leverage is considered to be a permanent part of the firms capitalization, so no fixed maturity date is needed for the analysis. A 30% tax rate is deemed appropriate for the analysis. - A. Find the EBIT indifference level associated with the two financial plans. (nearest $) - B. A detailed financial analysis of the firms prospects suggests that the long term EBIT will be above $340,000 annually. Taking this into consideration, which plan will generate the higher EPS?  |
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