Running Headogrady Apparel Case Study

Running Headogrady Apparel Case Study1ogrady Apparel Case Study

O’GRADY APPAREL CASE STUDY 4 Integrative Case 6 O’Grady Apparel Company Name of student Name of paper Professor’s name Date Due Answer; From part a , after-tax –cost for each source of financing under respective ranges are : Source of capital Range of New Financing After -Tax -Cost(%) Long -Term Debt $0-$700,.5%(1-0.4)=7.50% $700,000 and above 18%(1-0.4)=10.80% Preferred Stock $0 and above 17%(1-0.4)==17.94% Common stock equity $0 - $1,300,000 ($1.76/$20)100%+15%=23.80% $1,300,000 and above ($1.76/$16)100%+15%= 26% Calculations ; Cost of debt =rd(1-T) For the range $0-$700,000;rd=12.5% Before tax cost of debt, rd ={ I+(par-value -Nd)/n}/{(Nd+Par value)/2}, where Nd Nd=Net process from sales=Sales-Flotation cost - Premium (or discount), I= Interest in dollars, n= Number of years of maturity rd={I+($1000-Nd)/n}/{(Nd+$1000)/2} = {120+($1000-$970)/10}/{($970+$1,000)/2} = 0.125 or 12.5% Assuming leveraged capital structure consisting of 50% long-term debt, 10% preferred stock, and 40% common stock , the breakeven points for common stock and long term debt are; Common stock equity;$1,300,000/40% =$3,250,000 Long term debt: $700,000/50%= $1, 400,000 Thus the new Weighted Average Cost of Capital (WACC) capital structure ; Range Calculations WACC $0- $1,400,.50.075)+(0.10 0.179) +(0.400..060% $1,400,001 - $3,250,.50.108)+(0.10 0.179) +(0.400..710% Above $3,250,.50.108)+(0.10 0.179) +(0.400..590% From b) , the break even points are ; Common stock equity ;$1,300,000/65% =$2,000,000 Long term debt: $700,000/25%= $2, 800,000 Range Calculations WACC $0- $2,000,.250.075)+(0.10 0.179) +(0.650..135% $2,000,001 - $2,800,.250.075)+(0.10 0.179) +(0.650..565% Above $3,250,.250.108)+(0.10 0.179) +(0.65*0..390% d.)1.The effect of shifting to a capital structure that includes more debt while keeping the cost of each financing source the same is that , it will lead to change in the weighted average cost of the capital(WACC) . d.)2 .

A more leveraged capital structure usually has a lower weighted average cost of capital. The cost of equity is greater than cost of debt. In this regard the cost of capital of the new capital structure ( capital structure consisting of 50% long-term debt, 10% preferred stock, and 40% common stock ,) is lower than the cost of capital of the original capital structure. Therefore , the new capital structure seems better than the original one. Nevertheless, the new capital structure is coupled with more financial risk as it includes more debt .

PRIVATE ENCUMBRANCES Private encumbrances are voluntarily created by private parties who deal with the real property and consist of judgment liens, mechanic’s and materialmen’s liens, mortgages and trust deeds, easements, and restrictive covenants. Judgment Liens A lien is created when the property owner has been sued for a sum of money and a court has entered a judgment against the property owner. For example, a property owner is involved in an automobile accident. The property owner is sued for negligence and a $50,000 judgment is assessed against him by a court of law. Judgment liens do not become liens on real property until they have been recorded in a special book, called the Judgment Book or General Execution Docket, in the county where the real property is located.

A judgment lien remains a lien on real property until it has been paid or expires by passage of time. Most states have laws that limit the duration of a judgment lien. These laws provide that a judgment lien, if not paid, will expire within 7 to 14 years after becoming a lien on real property. Judgments attach at the time of recordation to all property then owned by the judgment debtor or to any property thereafter acquired by the judgment debtor. Judgments are potential title problems and can be discovered during a title examination.

Mechanic’s and Materialmen’s Liens A mechanic’s or materialmen’s lien is imposed by law on real property to secure payment for work performed or materials furnished for the construction, repair, or alteration of improvements on the real property. Each state has its own laws for the creation of these liens. Claimants under most mechanic’s or materialmen’s lien statutes include contractors, laborers, subcontractors, material suppliers, lessors of equipment and machinery, architects, professional engineers, and land surveyors. Most privately owned real property may be subjected to mechanic’s or materialmen’s liens. The lien attaches to all real property, including improvements, and all real property contiguous to the improved real property.

Public real property is not subject to mechanic’s or materialmen’s liens. Special Mechanic’s and Materialmen’s Lien Situations Sometimes special situations exist that prompt the creation of mechanic’s and materialmen’s liens. Landlord and Tenant . Work performed for a tenant of real property only attaches to the tenant’s interest in the real property, and not the landlord’s, unless the landlord of the real property consents to the work and agrees to pay for the work. Contract Seller and Purchaser .

Work performed for a purchaser of real property before a purchase and sale contract closes only attaches to the purchaser’s interest unless the seller has consented to the work. Husband and Wife. One spouse is ordinarily not an agent for the other spouse. Work performed at the request of one spouse is not a lien on the other spouse’s real property interest unless the other spouse has consented or agreed to pay for the work. Joint Tenants. A lien binds only the interest in the real property of the joint tenant who ordered the work. A joint tenant is not an agent for the other tenants, and unless the other tenants have consented or agreed to pay for the work, their interest in the real property is not liened. Other Mechanic’s and Materialmen’s Lien Considerations Other Mechanic’s and Materialmen’s Lien Considerations The right to a mechanic’s or materialmen’s lien usually arises once the work is performed or the material is furnished. The lien right must be perfected by filing a notice or claim of lien in the public records where the real property is located. Most states require that this notice or claim of lien be recorded within a reasonable period of time after completion of the work (60 to 120 days).

A claim or notice of lien requires the following information: (a) the amount of the claim, (b) the name of the lien claimant, (c) the name of the owner, (d) a description of real property to be liened, and (e) the notarized signature of the lien claimant. The priority of a lien claim dates from the time the first work is performed or the material is furnished. It does not attach from the date the claim of lien is filed, except for claims of architects, engineers, and land surveyors. For example, a material supplier provides materials for the construction of a home on March 1. The material supplier is not paid and finally files a claim of lien on May 1 for the unpaid materials.

The material supplier’s lien claim dates from March 1, the date the materials were furnished. This also means that the material supplier is ahead in terms of priority and will be paid ahead of any other lien claims that date after March 1. A mechanic’s or materialmen’s lien is enforced through a foreclosure suit or sale of the real property. States impose time limits for filing the foreclosure suit. The most common time limit is one year from the date the claim is due.

A mechanic’s or materialmen’s lien can be waived or terminated by a written waiver or release of lien. Most states require that lien waivers or releases of lien be signed by the lien claimant and be witnessed or notarized. Mortgages and Trust Deeds Real property can be pledged as security to pay debts of the owner. Mortgages and trust deeds are fully discussed in Chapter 10. Easements An easement is the right to use real property for a special purpose, such as a roadway, and can be given by the owner to a nonowner.

Easements are discussed fully in Chapter 5. Restrictive Covenants It is possible for real property owners to restrict the use of their real property. These restrictive covenants may be in the form of restrictions or covenants found in deeds of conveyance of the real property or in restrictions that are recorded against the real property. It is not unusual for real property that has been subdivided, such as single-family home subdivisions, industrial parks, and condominiums, to have restrictions regarding the use of the property by future real property owners. Private restrictive covenants often perform the same function as public zoning regulations, but in many instances they may be more restrictive than public zoning regulations. The private restrictions attempt to regulate the development of the real property in such a manner as to enhance the value of each individual owner’s lot or share of the real property. For example, restrictive covenants found in residential subdivisions usually restrict the size of the homes that can be built on the lots, subject the homes to architectural review committees, regulate the height of the homes, and require that certain portions of the property be left vacant for purposes of creating front, rear, and side yards. All these restrictions are designed to create a nice residential environment that will enhance the value of each owner’s home. Restrictive covenants are enforced by injunction or suit for damages. Enforcement may be brought by any person who bought real property with notice of the restrictions and in reliance on the restrictions. Therefore, any homeowner in a single-family subdivision can enforce the restrictive covenants against other homeowners. BOOK FOR CITATION Hinkel, Daniel F.. Practical Real Estate Law (Page 90). Delmar Cengage Learning.

Kindle Edition. 2 M E M O R A N D U M TO : Supervising Attorney FROM : [Student name] RE : LP Assignment DATE: FACTS: [Include the facts that are necessary to your answer. In most memos, the facts are written in chronological order.] QUESTION/ISSUE: [You may have more than one QUESTION/ISSUE and ANSWER for an assignment.] ANSWER: [Your answer should include one or more statements of law with BlueBook citations, an application or analysis of the law to the facts, and a conclusion. In other words, you are following the Legal Writing pattern IRAC: I (Issue), R (Rule), A (Application or Analysis), and C (Conclusion). ] Use APA style formatting: 1-inch margins, Times New Roman size 12 font, double-space. Use Bluebook citation.

Sheet1 O'Grady Apparel Company FV $1,000 Interest 12% Cost $ 970 (a Calculate the After -Cost Interest $120 Years 10 $3 Tax rate 0.4 $123 $985 Before tax 0.18 Before Tax 0.1249 ($700,000 & above) ($0 - $700,000) Source of Capital Range of New Financing After - tax Cost (%) Long - Term Debt $0-$700,.49% $700,000 & above 10.80% Formula: Rd(1 - T) Preferred Stock $0 & above 17.89% Par Value $60 Rate 0.17 Flotation Cost $57 Common Stock Next Year's Dividend 1.76 Present Stock $20 Growth 15% $0 - $1,300,.80% Present Stock $16 $1,300,000 & above 26.00% b) 1. Break point = (amount of capital at which the components’ cost of capital changes) / (weight of the component in the capital structures The first break point for debt is 700000/0.25 = $2,800,000 The first breakpoint for equity is at: /0.65 = $2,000,000 Break point for common equity is $2,000,) Range of total new financing: Method for Computation Source of capital Range of new financing Weight Cost of capital WACC DEBT cost after tax = Interest(1-Tax Rate) Long term debt % 10.80% 2.70% Annual Dividend/(Issue price - Floatation cost Preferred Stock 280000.4 10% 17.89% 1.79% Dividend/(Price of equity shares after netting and floatation cost) + Growth Common Stock Equity .6 65% 26.00% 16.90% Total % 21.39% 3)

Paper For Above instruction

The case of O’Grady Apparel provides an insightful examination of the company's capital structure decisions and their implications on financial performance. Analyzing the after-tax costs of different funding sources, calculating the weighted average cost of capital (WACC), and understanding private encumbrances form the core aspects necessary for strategic financial planning. This paper elaborates on these dimensions, emphasizing how optimizing debt and equity proportions can influence both risk and return, and illustrates legal considerations related to private encumbrances that impact property rights and liabilities.

Firstly, understanding the cost of capital is fundamental. For long-term debt, the before-tax interest rate of 12.5% applies to the range of $0-$700,000, with an after-tax cost derived by multiplying by (1 - tax rate). Given a tax rate of 40%, the after-tax cost for debt within this range is approximately 7.50%. For debt exceeding $700,000, the interest rate increases to 18%, leading to an after-tax cost of approximately 10.80%. The calculation considers interest, net proceeds, and maturity period, which collectively inform the overall cost of debt financing for the company.

Preferred stock, with a rate of 17%, incurs flotation costs and is adjusted for tax effects, resulting in an after-tax cost of roughly 17.94%. Common stock equity involves dividend discount models and growth assumptions. For instance, with a dividend of $1.76 and a current stock price of $20, along with a growth rate of 15%, the cost of equity is approximately 23.80% for the lower range and 26% for the higher range of the company's financing capacity.

Moving to the calculation of the weighted average cost of capital (WACC), the company employs a leveraged capital structure comprising 50% debt, 10% preferred stock, and 40% common equity. The break-even points for different financing components are determined by dividing the total available capital by their respective weights, resulting in thresholds that indicate when the company's cost structure would shift based on the volume of financing. For example, the break point for debt is $2,800,000, and for equity, it is $2,000,000, showing the levels at which component costs change due to structural constraints.

By calculating the WACC across different ranges of total financing, the company can identify optimal funding levels that minimize the cost of capital while balancing risk. The computed WACC varies from approximately 21.39% depending on the financing levels, illustrating the sensitivity of the cost of capital to capital structure adjustments.

Furthermore, shifting to a more leveraged capital structure, increasing debt proportion, typically reduces the overall WACC due to the tax shield benefits of debt financing. However, this comes with increased financial risk, notably in terms of bankruptcy potential and interest obligations, which must be carefully managed. The company must weigh the lower cost of debt against the elevated risk to determine the most prudent capital mix.

Private encumbrances significantly influence property rights and the company's obligations. Judgment liens, mechanic’s liens, mortgages, easements, and restrictive covenants are legal tools or restrictions voluntarily created or imposed on real property. Judgment liens, for instance, are recorded following legal judgments and can persist for 7 to 14 years unless paid or otherwise resolved. Mechanics’ liens secure claims for unpaid work and materials and require proper recording within a stipulated timeframe, affecting property titles and transferability.

The legal enforcement of such encumbrances involves foreclosure or sale, which may limit transferability or increase transaction costs. Mortgages and trust deeds provide security interests, creating obligations that can influence liquidity and borrowing capacity. Easements and restrictive covenants further restrict property use to enhance value or comply with zoning and community standards, affecting property utility and marketability. Proper management of these private encumbrances is crucial for maintaining clear title and operational flexibility.

In conclusion, financial strategy concerning capital structure and legal considerations like private encumbrances are integral to strategic corporate management. Efficient allocation of debt and equity, balanced with risk management, enhances cost efficiency and corporate valuation. Simultaneously, understanding legal encumbrances ensures clear stewardship of property rights, minimizing legal disputes and safeguarding asset values. Effective integration of both financial and legal dimensions is essential for sustainable growth and competitive advantage in the real estate and apparel industries.

References

• Hinkel, D. F. (2014). Practical Real Estate Law. Delmar Cengage Learning.
• Brigham, E. F., & Ehrhardt, M. C. (2017). Financial Management: Theory & Practice. Cengage Learning.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
• Damodaran, A. (2015). Applied Corporate Finance. Wiley.
• Myers, S. C. (2001). Capital structure. The Journal of Finance, 46(3), 745-754.
• Riccio, A