Part II The company has the following capital structure: Account $ Costs before
ID: 2776034 • Letter: P
Question
Part II
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?
Based on the following information and data in part II prepare Performa Income Statement. Also, calculate the DOL, DFL and DTL and earring 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 if any) in order to achieve that goal? What would be the new WACC?
Account
$
Costs before tax
Long-term Debt
1,500,000
10%
Preferred Stock
500,000
12%
Common Stock
3,000,000
20%
Explanation / Answer
Answer
Weighted average cost of capital is 16.20%.
Income Statement.
Particulars Amount ($)
Ratio (DOL, DFL & DTL)
= 4.00
DTL = 6
6 = DFL*2.29
DFL = 6/2.29
DFL = 2.62
Weighted avaerage cost of capital