Reference no: EM131011175
You're a financial analyst at Pinkerton Interactive Graphic Systems (PIGS), a successful entrant in a new and rapidly growing field. As in most new fields, however, rapid growth is anything but ensured, and PIGS's future performance is uncertain.
The firm expects to earn operating profits of $4 million next year, up from $1 million last year. To support this enormous growth the firm plans to raise $15 mil- lion in new capital. It already has capital of $5 million that is 40% debt.
PIGS can raise the new money in any proportion of debt and equity manage- ment chooses. The CFO is considering three possibilities: all equity, $8 million debt and $7 million equity, and all debt.
Interest on the current debt as well as on new borrowing is expected to be 10%, and the company pays state and federal income taxes at a combined rate of 40%. Equity will be raised by selling stock at the current market price of $10, which is equal to its book value.
The CFO has asked you to prepare an analysis to aid management in making the debt/equity decision. You are also to provide a recommendation of your own.
a. Prepare an EBIT-EPS analysis of the situation showing a line for the capital structure that results from each of the three options. (Calculate EPS under each new capital structure at EBIT levels of $1 million, $2 million, and $4 million. Then graph EBIT versus EPS for each option. Refer to Figure 14.3. Show last year's EPS on the graph.)
b. Discuss the effect the options might have on stock price.
c. Make a subjective recommendation under each of the following assumptions about the $4 million operating profit forecast. Support your position with words and references to your EBIT-EPS analysis.
1. The $4 million operating profit projection is a best-case scenario. Anything from ($2) million to $4 million has an equal probability of occurring.
2. The $4 million is a fair estimate with about a 60% probability. However, per- formance better than $4 million is unlikely. Results could range anywhere from zero to $4 million.
3. The $4 million is an easy target. There's an even chance of anything between $4 million and $8 million.
|
Why is a correlation the most appropriate statistic
: Why is a correlation the most appropriate statistic? What is the correlation between student anxiety scores and number of study hours? Select alpha and interpret your findings. Make sure to note whether it is significant or not and what the effect ..
|
|
Calculate the friction losses in the pipeline
: Diameter of the tube is 0.0525 m. Volumetric flow rate is 0.379 m^3/min. Density of water is known as 1000 kg/m^3, viscosity of water is known as 1 cp. Calculate the friction losses in the pipeline ( Ev and Ev).
|
|
Cranberry company of the previous problem
: Suppose automated equipment is added that increases fixed costs by $20,000 per month. How much will total variable cost have to decrease to keep the breakeven point the same?
|
|
Cranberry contribution and contribution margin
: Cranberry Wood Products Inc. spends an average of $9.50 in labor and $12.40 in materials on every unit it sells. Sales commissions and shipping amount to another $3.10. All other costs are fixed and add up to $140,000 per month. The average unit s..
|
|
Pinkerton interactive graphic systems
: You're a financial analyst at Pinkerton Interactive Graphic Systems (PIGS), a successful entrant in a new and rapidly growing field. As in most new fields, however, rapid growth is anything but ensured, and PIGS's future performance is uncertain.
|
|
Find the unit binormal vector at the given instant
: Find the unit tangent vector T(t) at the instant t = 1. Find the unit binormal vector B(t) at the instant t = 1. Find the unit normal vector N(t) at the instant t = 1.
|
|
Current and proposed capital structures
: a. Calculate EPS under the current and proposed capital structures. b. Calculate the DFL under both structures. c. Use the DFLs to forecast the resulting EPS under each structure if operating profit falls off by 5%, 10%, or 25%.
|
|
Calculate the factor of safety for each stress state
: Plot the following sets of stress states on a set of principal axes (an example is provided in Figure 2A of the Appendix). Calculate the factor of safety for each stress state using both the Brittle Coulomb Mohr and Modified Mohr failure theories.
|
|
Explain how gender was at work to keep society orderly
: An explanation that incorporates the structural-functional theory to explain how gender was at work to keep society orderly in the social setting that you chose
|