Part I
The company has the following capital structure:
|
Account
|
$
|
Costs before tax
|
|
Long-Term Debt
|
1,500,000
|
10%
|
|
Preferred Stock
|
500,000
|
12%
|
|
Common Stock
|
3,000,000
|
20%
|
Calculate the weighted average cost of capital (tax is 40%)
Using the same cash flows in exhibit I find the NPV, PI, IRR and MIRR (Use your answer on part one as cost of capital). Which project(s) would you recommend and why?
Part II
Based on the following information and data in part I prepare Performa income statement. Also, calculate the DOL, DFL, and DTL and earning per share.
Q=20,000 units
Price=$120
VC=$80
Fixed cost=$450,000
100,000 outstanding shares
Assume that the management has a target DTL of 6. How much debt needs to be retired (replace by common stocks) in order to achieve that goal? What would be the new WACC?
Exhibit Project cash flows in (00)
|
Project1
|
Project2
|
Project3
|
Project4
|
Project5
|
Project6
|
Project7
|
Project8
|
|
Initial Investment
|
$2,000
|
$2,000
|
$2,000
|
$2,000
|
$2,000
|
$2,000
|
$2,000
|
$2,000
|
|
Year
|
|
|
|
|
|
|
|
|
|
1
|
$330
|
$1,666
|
|
$160
|
$280
|
$2,200
|
$1,200
|
$(350)
|
|
2
|
$330
|
$334
|
|
$200
|
$280
|
|
$900
|
$(60)
|
|
3
|
$330
|
$165
|
|
$350
|
$280
|
|
$300
|
$60
|
|
4
|
$330
|
|
|
$395
|
$280
|
|
$90
|
$350
|
|
5
|
$330
|
|
|
$432
|
$280
|
|
$70
|
$700
|
|
6
|
$330
|
|
|
$440
|
$280
|
$4,000
|
|
$1,200
|
|
7
|
$330
|
|
|
$442
|
$280
|
|
|
$2,250
|
|
8
|
$1,000
|
|
|
$444
|
$280
|
|
|
|
|
9
|
|
|
|
$446
|
$280
|
|
$2,000
|
|
|
10
|
|
$5,000
|
|
$448
|
$280
|
|
|
|
|
11
|
|
|
|
$450
|
$280
|
|
|
|
|
12
|
|
|
|
$451
|
$280
|
|
|
|
|
13
|
|
|
|
$451
|
$280
|
|
|
|
|
14
|
|
|
|
$452
|
$280
|
|
|
|
|
15
|
|
|
$9,000
|
$(2,000)
|
$280
|
|
|
|
|
Sum of Cash Flow
|
|
|
|
|
|
|
|
|
|
Benefits
|
$3,310
|
$7,165
|
$9,000
|
$3,561
|
$4,200
|
$6,200
|
$4,560
|
$4,150
|
|
Excess of cash flow
|
|
|
|
|
|
|
|
|
|
Over investment
|
$1,310
|
$5,165
|
$7,000
|
$1,562
|
$2,200
|
$4,200
|
$2,560
|
$2,150
|