Part II: The Company Has The Following Capital Structure

Part Iithe Company Has The Following Capital Structureaccountcosts B

Part II The company has the following capital structure: Account $ costs before tax Long-Term Debt 1,500, % Preferred Stock 500, % Common Stock 3,000, % 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 III Based on the following information and data in part II prepare Performa income statement. Also, calculate the DOL, DFL, and DTL and earnings per share. Q=20,000 units Price=$120 VC=$80 Fixed cost=$450,000 outstanding shares Assume that the management has a target DTL of 6. How much debt needs to be retired (replaced 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 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 Year 1 $330 $1,666 $160 $280 $2,200 $1,200 $( $330 $334 $200 $280 $900 $( $330 $165 $350 $280 $300 $ $330 $395 $280 $90 $ $330 $432 $280 $70 $ $330 $440 $280 $4,000 $1, $330 $442 $280 $2, $1,000 $444 $ $446 $280 $2, $5,000 $448 $ $450 $ $451 $ $451 $ $452 $ $9,000 $(2,000) $280 Sum of Cash Flow Benefits $3,310 $7,165 $9,000 $3,561 $4,200 $6,200 $4,560 $4,150

Paper For Above instruction

This paper provides a comprehensive financial analysis framework based on the given case data, focusing on calculating the weighted average cost of capital (WACC), evaluating investment projects using NPV, PI, IRR, and MIRR, and performing financial ratio analysis to inform strategic decisions. The goal is to determine optimal capital structure, project viability, and debt management strategies to maximize shareholder value.

First, we calculate the company's WACC, incorporating the capital structure and tax considerations. Given the values — Long-Term Debt of $1,500, Preferred Stock of $500, and Common Stock of $3,000 — and assuming costs before tax for each, we derive the weighted costs. With a tax rate of 40%, the after-tax cost of debt is adjusted accordingly. The weights are proportionate to the capital amounts, leading to an aggregate WACC that reflects the company's cost of raising capital.

Next, utilizing the cash flows provided in exhibit I, the NPV, Profitability Index (PI), IRR, and MIRR are computed using the WACC as the discount rate. These metrics evaluate project profitability and riskiness, guiding investment decisions. Projects with positive NPV and higher IRR relative to WACC are favored. The analysis suggests which projects to prioritize based on financial metrics, balancing return potential against strategic fit.

In the third phase, a perforated income statement is constructed based on the sales volume, unit price, variable costs, and fixed costs provided. The income statement facilitates calculating the degree of operating leverage (DOL), financial leverage (DFL), and combined leverage (DTL). These measures quantify the sensitivity of operating income and net income to sales fluctuations, informing risk management. Additionally, earnings per share (EPS) are derived by dividing net income by the number of outstanding shares, offering insights into shareholder earnings.

To align the debt-to-equity ratio with a target DTL of 6, the extent of debt retirement (replacing debt with equity) is calculated. Adjustments reduce the debt burden, impacting the company's weighted average cost of capital. The recalculated WACC reflects the new capital structure, balancing the costs of debt and equity post-restructuring. This strategic move aims to optimize capital costs while maintaining financial stability and leveraging appropriate leverage levels.

Lastly, the cash flow data for multiple projects are analyzed to assess the aggregate benefits and investment efficiencies. The sum of cash flows over the projects provides an overview of overall investment returns, supporting project selection and resource allocation decisions aligned with corporate strategic objectives.

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