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Principles of Corporate Finance Assignments 1. The manager of Parking Structures, Inc. believes that by adding new bright lighting to their main...

Percy’s, Inc. is considering the purchase of a small company which supplies the firm with a major component used to manufacture its main product. The purchase would be financed by the sale of common stock or a bond issue. The financial manager needs to evaluate how the two alternative financing plans would affect the earnings potential of the firm. Total financing required is $3.0 million. The firm currently has $7,000,000 of 10% bonds and 200,000 shares of common stock outstanding. The firm can arrange financing of the $3.0 million through either a 12% bond issue or the sale of 50,000 shares of common stock. The firm’s tax rate is 40%.
(a) At what EBIT level will EPS  $0 for each financing plan?
(b) Graph the two financing plans on a set of EBIT  EPS axes. (Calculate and plot EPS at EBIT levels of $250,000, $500,000, $1,000,000, $1,500,000, $2,500,000, and $3,500,000.)
(c) According to your graph, at what EBIT level does the bond financing plan become superior?
(d) If the firm estimates EBIT of $3,000,000, which financing plan would you recommend?
Principles of Corporate Finance Assignments 1. The manager of Parking Structures, Inc. believes that by adding new bright lighting to their main downtown parking garage, the usage of the facility will allow the total benefits from the garage to increase to $1,250,000 from the current benefit of $1,110,000, both in today’s dollars. The new lighting will cost $80,000 to install. Determine the marginal (added) benefits of the new lighting and the net benefit of the proposed new lighting. Should the manager recommend the change? 2. Kaufman Chemical is evaluating the purchase of a new multi-stage centrifugal compressor for its wastewater treatment operation which costs $750,000 and requires $57,000 to install. This outlay would be partially offset by the sale of an existing compressor originally purchased five years ago for $490,000. It is being depreciated using a five-year recovery schedule under ACRS and can currently be sold for $150,000. The existing compressor’s maintenance costs are increasing, and the new compressor could reduce operating costs before depreciation and taxes by $280,000 annually for the next five years. The new equipment will be depreciated under a five-year recovery schedule using ACRS. The firm has an 18% cost of capital and a 40% tax of ordinary and capital gain income. Evaluate whether Kaufman Chemical should replace its existing wastewater treatment equipment with the new compressor. (Do not consider the terminal value of the new compressor in your analysis.)
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3. The Vanguard Group, Inc. has compiled the following financial statements and comparative financial ratios for the year-end review. Balance Sheet Vanguard Group, Inc. December 31, 2005 Assets Current Assets Cash $118,750 Accounts receivable 296,250 Inventory 303,750 Total current assets $718,750 Gross fixed assets $625,000 Less: Accumulated depreciation 93,750 Net fixed assets 531,250 Total assets $1,250,000 Liabilities and Stockholders’ Equity Current Liabilities Accounts payable $111,250 Notes payable 211,250 Accruals 108,750 Total current liabilities $431,250 Long-term debt 235,000 Total liabilities $666,250 Stockholders’ equity Common stock 318,750 Retained earnings 265,000 Total stockholders’ equity $583,750 Total liabilities and stockholders’ equity $1,250,000 Income Statement Vanguard Group, Inc. for the Year Ended December 31, 2005 Sales revenue $1,680,000 Cost of sales 1,362,480 Gross profits $317,520 Less: Operating expenses Selling expense $125,600 General and administrative expense 81,600 Depreciation expense 24,000 Total operating expense $231,200 Operating profits $86,320 Less: Interest expense 15,600 Net profits before taxes $70,720 Less: Taxes (40%) 28,288 Net profits after taxes $42,432
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