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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
Year
1
$330
$1,666
$160
$280
$2,200
$1,200
$(350)
2
$334
$200
$900
$(60)
3
$165
$350
$300
$60
4
$395
$90
5
$432
$70
$700
6
$440
$4,000
7
$442
$2,250
8
$1,000
$444
9
$446
10
$5,000
$448
11
$450
12
$451
13
14
$452
15
$9,000
$(2,000)
Sum of Cash Flow
Benefits
$3,310
$7,165
$3,561
$4,200
$6,200
$4,560
$4,150
Excess of cash flow
Over investment
$1,310
$5,165
$7,000
$1,562
$2,560
$2,150
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