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Midland Chemical Industries (December 31 Statements) (in thousands of dollars) 2008 Assets Cash and cash equivalents Accounts Receivable Inventories

I need to answer the attached finance problem.
Midland Chemical Industries (December 31 Statements) (in thousands of dollars) 2008 2009 Assets Cash and cash equivalents $89,725 $102,850 Accounts Receivable $85,527 $103,365 Inventories $34,982 $38,444 Total current assets $210,234 $244,659 Net fixed assets $42,436 $67,165 Total assets $252,670 $311,824 Liabilities and equity Accounts payable $23,109 $30,761 Accruals $22,656 $30,477 Notes payable $14,217 $16,717 Total current liabilities $59,982 $77,955 Long-term debt $63,914 $76,210 Total liabilities $123,896 $154,165 Common stock 10,000,000 Shares $90,000 $100,000 Retained Earnings $38,774 $57,659 Total common equity $128,774 $157,659 Total liabilities and equity $252,670 $311,824 2008 2009 Sales $364,120 $455,150 COGS $271,109 $331,878 Gross Profit $93,011 $123,272 Admin Expenses $50,000 $55,000 Depreciation $6,752 $7,388 EBIT $36,259 $60,884 Interest Expense $7,829 $8,575 EBT $28,430 $52,309 Taxes (40%) $11,372 $20,924 Net Income $17,058 $31,385 Common dividends $6,823 $12,500 Addition to retained earnings $10,235 $18,885 The last two years of financial information in the form of Income Statements and Balance Sheets for the Midland Chemical Company is presented in the table attached. The company is anticipating growth and attempting to plan on the level of financing needed and best way of expanding their production capacity. The current price of their common stock is $17.25 per share and the equity Beta for the company is approximately 1.75. If additional financing is needed, they will be financing using the same debt to equity capital structure as their current market debt to equity ratio. If they need to issue debt, they expect to issued 7 year Bonds, $1000
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Face Value, 8 percent Coupon Rate and expect to receive 1034 after all transaction costs. The Expected return on the Market is expected to be 11 percent and the market risk premium is 7 percent above the current risk-free rate of interest of 4 percent. Midland Chemical’s normal growth rate is 8 percent. If the company needs to expand the capacity of their fixed plant and equipment, they have two production options to consider. Option A has an Initial Cost of $49,000,000 and will support the projected change in sales at a Cost of Goods Sold near their current rate. Option B has the same capacity, but is more expensive at $52,500,000 but is will lower the Cost of Goods Sold to 63 percent of sales for the marginal production. Using the information provided, please determine the following: 1. Determine Free Cash Flow during the fiscal year 2009. 2. Assuming the company has excess capacity , project Income Statement and balance Sheets for 2010 with the 15% increase in sales; determine the level of external financing needed to support those sales. 3. Assuming you need to expand your capacity to support the new sales which method of production should you adopt? and why? Assume a 7 year horizon for your investment and use straight line depreciation with no salvage value on the equipment. Use both the Security Market Line and Dividend Growth Model is your estimation of Cost of Capital. 4. Project your project Income Statement and Balance Sheets for 2010 with the 15% increase in sales and the increase in capacity. 5. If you decided not to issues any new stock (or as little as possible) and you wanted to use retained earnings to finance new investment in assets, do you have enough internally generated income to finance the project? Would there be any dividends and if so how much?
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