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Linda_us, Finance, Accounts & Homework Tutor
Category: Homework
Satisfied Customers: 7291
Experience:  Post Graduate Diploma in Management (MBA)
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# Hi Linda, can you help me with these questions and will it

### Resolved Question:

Hi Linda, can you help me with these questions and will it be possible to get them back tonight:)

1. The target capital structure for Jowers Manufacturing is 50 percent common stock, 16 percent preferred stock, and 34 percent debt. If the cost of equity for the firm is 19.6 percent, the cost of preferred stock is 12.5 percent, and the before-tax cost of debt is 9.9 percent, what is Jower’s cost of capital? The firm’s marginal tax rate is 34 percent.

Jower’s WACC is _____% (Round to three Decimal Places)

2. As a member of the Finance Dept. 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 from the firm, you have determined the market value of the firm's capital structure as follows: Bonds \$4,200,000 Preferred stock \$2,000,000 Common stock \$6,400,000

To finance the purchase, Ranch Manufacturing will sell 10 year bonds paying 7.1% per year at the market price of \$1,074. Preferred stock paying a \$208 dividend can be sold for \$24.28 Common stock for Ranch Manufacturing is currently selling for \$55.66 per share and the firm paid a 3.01% dividend last year. Dividends are expected to continue growing at a rate of 5.4% per year into the indefinite future. If the firm’s tax rate is 30% what discount rate should you use to evaluate the equipment purchase?

Ranch Manufacturing's WACC is ____% round to three decimals

3. 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 \$2.2 million dollars would be raised be selling 82,000 shares of common stock.
• Plan B would involve issuing \$1.2 million dollars in long-term bonds with an effective interest rate of 12.3% plus \$1.0 million would be raised by selling 41,000 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.

a. Find the EBIT indifference level associated with the two financing plans.
The EBIT indifference level associated with the two financing plans is \$____.
(Round to the nearest dollar.)

4. 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 investigators in Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for consideration:

The first (Plan A) is an all common-equity capital structure. \$2.2 million dollars would be raised by selling common stock at \$10 per common share.

Plan B: Would involve the use of financial leverage. \$1.3 million dollars would be raised by selling bonds with an effect interest rate of 10.7% (per annum), and the remaining \$0.9 million 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 maturity date is needed for the analysis. A 34% tax rate is deemed appropriate for the analysis.

Question A: Find the EBIT indifference level associated with the two financing plans. (Round to the nearest dollar)

Question B: A detailed financial analysis of the firm’s prospects suggest that the long term EBIT will be above \$324,000 annually. Taking this into consideration which plans will generate the higher EPS?
Submitted: 3 years ago.
Category: Homework
Expert:  Linda_us replied 3 years ago.
Thanks for requesting me. I will post the solution in 2 hours.
Customer: replied 3 years ago.

Ok, thanks so much :)

Expert:  Linda_us replied 3 years ago.
Please confirm for ranch "paying a \$208 dividend can be sold for \$24.28"

dividend is 2.08??
Expert:  Linda_us replied 3 years ago.
THIS ANSWER IS LOCKED!

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Linda_us, Finance, Accounts & Homework Tutor
Category: Homework
Satisfied Customers: 7291
Experience: Post Graduate Diploma in Management (MBA)
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