Gramling Inc. is considering an investment in new operating equipment with a 15-year life. The new equipment will cost $300,000 and a one-time cost of $15,000 will be incurred to remove the old equipment and install the new equipment. The old equipment that will be replaced originally cost $200,000 and has a current book value of $25,000. This old equipment will be sold for $8,000. The new equipment will be depreciated uniformly over its useful life. At the end of 15 years, this equipment will be removed and given to the local recycling center. The new equipment is expected to generate cash profits of $83,000 per year. Gramling uses an 11 percent hurdle rate (its market rate of interest) to evaluate long-term projects and is subject to a 30 percent tax rate.
Required:
A. Should Gramling invest in this equipment?
B. Assuming that Gramling does invest in the equipment, which of the following financing options would be best, a 10-year noninterest-bearing note (annual compounding) or a 10-year monthly installment note?
CT15.1. The Shepersky Corporation was authorized to issue 2,000,000 shares of $0.01 par value common stock and 200,000 shares of $50 par value, 10 percent preferred stock. To date, Shepersky has issued 600,000 shares of common stock and no preferred stock. Shepersky is contemplating the acquisition of a new piece of equipment and wants to issue stock to raise the $200,000 cash to finance its acquisition. The company is trying to decide whether to issue 10,000 shares of common stock or 4,000 shares of preferred stock.
Required:
A. Describe how the issue of each type of stock would affect the stockholders' equity of Shepersky Corporation.
B. If Shepersky generates about $3,600,000 of net income each year and the new machine can generate an additional $40,000 of after-tax income, how will the earnings of the common shareholders be affected if:
1. Preferred stock is issued?
2. Common stock is issued?