$73.16 555.00 Table 2. Comparable Companies. Aerospace Stock Price Market Cap PE Equity Beta LT De Total Debt to to Capital Equity Bocing Company BA 13.0X 09 28 91.26 Be Acrospace Inc BEAVI $26.98 $3.30 12.5X 1.4 11.95 12.07 Empresa Brasileira De Acrona ER $33.27 $6.20 1.1 27.97 59.44 Esterline Technologies Corp ESL 55.82 S1.80 16.8X 1.1 40.56 42.41 Goodrich Corporation GR SS5.89 $7,00 12.8 1 60.59 67.76 Hexcel Corporation HXL 523.61 $2.50 26.5X 73.78 73.88 Lockheed Martin Corporation LMT $103.73 $44.00 14.SX 1.3 43.89 44.95 Precision Castparts Corp. PCP5104.00 $16.80 1.2 8.28 8.78 Rockwell Collins COL S$5.66 $8.90 14 SX 1 14.18 14.18 United Technologies CP UTX 567.01 549.10 14 3X 1 37.53 42.08 115 Table 3. Balance Sheet 2007 LIABILITIES 2007 Cash & ST Investments $13.000.000 Accounts Payable $105.000.000 Short Term Debt & Current Portion of Long-Term Receivables (Net) $241.000.000 Debt $1.000.000 Inventory-Finished Goods and in Progress $175.000.000 Accrued Payroll $70,000.000 Progress Payments & Other ($30,000,000 Other Current Liabilities $87.000.000 Other Current Assets $47.000.000 Current Liabilities - Total $263.000.000 Current Assets - Total $447.000.000 Long Term Debt $184.000.000 Provision for Risks and Charges $89.000.000 Deferred Taxes (557.000.000 Property. Plant & Equipment - Gross $396.000.000 Other Liabilities $127.000.000 Accumulated Depreciation (5218,000,000)Total Liabilities $607.000.000 Tangible Other Assets $70,000.000 Capital Surplus $207.000.000 Intangible Other Assets $13.000.000 Other Appropriated Reserves (563,000,000 Property, Plant & Equipment - Net $261,000,000 Retained Earnings $384.000.000 Other Assets $427.000.000 Common Equity $528.000.000 Total Assets $1.134.000.000 Total Liabilities & Shareholders Equity |$1.134.000.000 Table 4-Income Statement 2007 Net Sales or Revenues $1.634.571.154 Cost of Goods Sold ($1,102,000,000 Depreciation, Depletion & Amortization ($35,000,000 Gross Income $497,571,154 Selling. General & Admin Expenses $324.000.000 Operating Income $4,000,000 Earnings Before Interest & Taxes (EBIT) $169.571.154 Interest Expense On Debt $15.725.000 Pretax Income $153,846,154 Income Taxes $53,846,154 Net Income After Taxes $100.000.000 Table 5 Market Information Securities Treasures Yields: in 2007 Market Risk Premium BilsBonds 5% 17% 8% 6% International Tele-Space Corporation International Tele-Space Corporation (ITSC) has two divisions, Telecommunication Services and Aerospace. As of the end of its fiscal year on August 31, 2007, ITSC had 37 million shares outstanding with today's market price of $50.00 and a P/E ratio of 18.50 times. ITSC has $184 million bonds on its balance sheet and the bonds have been rated AA with trading price at their face value. The Company pays the interest payment at the rate of T-bond rate plus the spread based on its bond rating. The current beta for the Company is 1.30 with income tax rate of 35% New Investment Opportunity The Company has won a 10-year government contract to produce the latest model of secret space weapon. To accomplish this, ITSC has established a wholly owned division, Space Industrial Complex (SIC), for the production. The new division will require a $100 million investment. ITSC has already funded $20 million from its internal funds for this investment and is seeking to determine whether the remaining funds should come from its 2007 income or finance it with all equity or a combination of new debt and equity. The Company is also uncertain about the impact of new debt on its bond rating and capital structure, and would like to know which of the following capital structures (debt-equity ratio) as shown in Table-I would result in highest value for the investment and shareholders, DE Ratin Spread 0.79 1.00 25.00 ALA M BE ec . 100 13.00 2. Financial Background In the past, ITSC had earned pre-tax return of 14.9402% on its total assets and its last year EBIT (2007) was 14.953646%X (51,134,000,000) = $169,571,154. It is estimated that the new contract will provide additional pre-tax return of 20% on the new investment. Notwithstanding that this project would bring additional revenue to the Company, however, ITSC wonders that what be the effect of the proposed financing on its share value, cost of capital, debt coverage, credit rating, and earnings per share. REQUIRED: 1. What is the current EPS? 2. What are the EPS for each proposed capital structure? 3. What is the current interest coverage ratio? 4. What are the interest coverage ratio for each proposed capital structure? s What is the current cost of equity and WACC? 6. What are the weighted average costs of capitals (WACC) for each proposed capital structure? 7. What are the stock prices with each proposed capital structure? & What is the optimal Capital Structure? .. What is the new WACC for the Company with the new division? $73.16 555.00 Table 2. Comparable Companies. Aerospace Stock Price Market Cap PE Equity Beta LT De Total Debt to to Capital Equity Bocing Company BA 13.0X 09 28 91.26 Be Acrospace Inc BEAVI $26.98 $3.30 12.5X 1.4 11.95 12.07 Empresa Brasileira De Acrona ER $33.27 $6.20 1.1 27.97 59.44 Esterline Technologies Corp ESL 55.82 S1.80 16.8X 1.1 40.56 42.41 Goodrich Corporation GR SS5.89 $7,00 12.8 1 60.59 67.76 Hexcel Corporation HXL 523.61 $2.50 26.5X 73.78 73.88 Lockheed Martin Corporation LMT $103.73 $44.00 14.SX 1.3 43.89 44.95 Precision Castparts Corp. PCP5104.00 $16.80 1.2 8.28 8.78 Rockwell Collins COL S$5.66 $8.90 14 SX 1 14.18 14.18 United Technologies CP UTX 567.01 549.10 14 3X 1 37.53 42.08 115 Table 3. Balance Sheet 2007 LIABILITIES 2007 Cash & ST Investments $13.000.000 Accounts Payable $105.000.000 Short Term Debt & Current Portion of Long-Term Receivables (Net) $241.000.000 Debt $1.000.000 Inventory-Finished Goods and in Progress $175.000.000 Accrued Payroll $70,000.000 Progress Payments & Other ($30,000,000 Other Current Liabilities $87.000.000 Other Current Assets $47.000.000 Current Liabilities - Total $263.000.000 Current Assets - Total $447.000.000 Long Term Debt $184.000.000 Provision for Risks and Charges $89.000.000 Deferred Taxes (557.000.000 Property. Plant & Equipment - Gross $396.000.000 Other Liabilities $127.000.000 Accumulated Depreciation (5218,000,000)Total Liabilities $607.000.000 Tangible Other Assets $70,000.000 Capital Surplus $207.000.000 Intangible Other Assets $13.000.000 Other Appropriated Reserves (563,000,000 Property, Plant & Equipment - Net $261,000,000 Retained Earnings $384.000.000 Other Assets $427.000.000 Common Equity $528.000.000 Total Assets $1.134.000.000 Total Liabilities & Shareholders Equity |$1.134.000.000 Table 4-Income Statement 2007 Net Sales or Revenues $1.634.571.154 Cost of Goods Sold ($1,102,000,000 Depreciation, Depletion & Amortization ($35,000,000 Gross Income $497,571,154 Selling. General & Admin Expenses $324.000.000 Operating Income $4,000,000 Earnings Before Interest & Taxes (EBIT) $169.571.154 Interest Expense On Debt $15.725.000 Pretax Income $153,846,154 Income Taxes $53,846,154 Net Income After Taxes $100.000.000 Table 5 Market Information Securities Treasures Yields: in 2007 Market Risk Premium BilsBonds 5% 17% 8% 6% International Tele-Space Corporation International Tele-Space Corporation (ITSC) has two divisions, Telecommunication Services and Aerospace. As of the end of its fiscal year on August 31, 2007, ITSC had 37 million shares outstanding with today's market price of $50.00 and a P/E ratio of 18.50 times. ITSC has $184 million bonds on its balance sheet and the bonds have been rated AA with trading price at their face value. The Company pays the interest payment at the rate of T-bond rate plus the spread based on its bond rating. The current beta for the Company is 1.30 with income tax rate of 35% New Investment Opportunity The Company has won a 10-year government contract to produce the latest model of secret space weapon. To accomplish this, ITSC has established a wholly owned division, Space Industrial Complex (SIC), for the production. The new division will require a $100 million investment. ITSC has already funded $20 million from its internal funds for this investment and is seeking to determine whether the remaining funds should come from its 2007 income or finance it with all equity or a combination of new debt and equity. The Company is also uncertain about the impact of new debt on its bond rating and capital structure, and would like to know which of the following capital structures (debt-equity ratio) as shown in Table-I would result in highest value for the investment and shareholders, DE Ratin Spread 0.79 1.00 25.00 ALA M BE ec . 100 13.00 2. Financial Background In the past, ITSC had earned pre-tax return of 14.9402% on its total assets and its last year EBIT (2007) was 14.953646%X (51,134,000,000) = $169,571,154. It is estimated that the new contract will provide additional pre-tax return of 20% on the new investment. Notwithstanding that this project would bring additional revenue to the Company, however, ITSC wonders that what be the effect of the proposed financing on its share value, cost of capital, debt coverage, credit rating, and earnings per share. REQUIRED: 1. What is the current EPS? 2. What are the EPS for each proposed capital structure? 3. What is the current interest coverage ratio? 4. What are the interest coverage ratio for each proposed capital structure? s What is the current cost of equity and WACC? 6. What are the weighted average costs of capitals (WACC) for each proposed capital structure? 7. What are the stock prices with each proposed capital structure? & What is the optimal Capital Structure? .. What is the new WACC for the Company with the new division