hi Grade Regulator company currently has 100000 shares of common stock outstanding with a market price of $60 per share. it also has $2 million in 6 % bonds. the company is considering a $3 million expansion program that it can finance with all common stock at $60 a share (option 1), straight bonds at 8 % interest (option 2), preferred stock at 7 % (option ), and common stock at $60 per share and 8% bonds (option 4).

for an expected EBIT level of $ 1 million after the expasion program, calculate the earnings per share for each of the alternative methods of financing. Assume a tax rate of 50%

Case let No. 1 The Maiwand Company and the Afghan Company are identical in every respect except that the Maiwand Company is not financially levered, whereas the Afghan Company has $2 million in 12 percent bonds outstanding. There are no taxes, and capital markets are assumed to be perfect. The earnings of both companies are not expected to grow, and all earnings are paid out to shareholders in the form of dividends. The valuation of the two firms is shown as follows: MAIWAND O Net operating income $ 600,000 I Interest on debt 0 E Earnings available to common shareholders (O I ) $ 600,000 ke Equity capitalization rate 0.15 S Market value of stock (E/ke) $4,000,000 B Market value of debt 0 V Total value of firm (B + S) $4,000,000 ko Implied overall capitalization rate [ki(B/V) + ke(S/V)] 0.15 B/S Debt-to-equity ratio 0 AFGHAN $ 600,000 240,000 $ 360,000 0.16 $2,250,000 2,000,000 $4,250,000 0.1412 0.89 a. You own $22,500 worth of Afghan stock. Show the process and the amount by which you could reduce your outlay through the use of arbitrage. b. When will this arbitrage process cease? Case let No. 2 Cybernauts, Ltd., is a new firm that wishes to determine an appropriate capital structure. It can issue 16 percent debt or 15 percent preferred stock. The total capitalization of the company will be $5 million, and common stock can be sold at $20 per share. The company is expected to have a 50 percent tax rate (federal plus state). Four possible capital structures being considered are as follows: PLAN 1 2 3 4 a. DEBT 0% 30 50 50 PREFERRED 0% 0 0 20 EQUITY 100% 70 50 30 Construct an EBIT-EPS chart for the four plans. (EBIT is expected to be $1 million.) Be sure to identify the relevant indifference points and determine the horizontal-axis intercepts. b. Which plan is best? Why? Case let No. 3 Hi-Grade Regulator Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has $2 million in 6 percent bonds. The company is considering a $3 million expansion program that it can finance with all common stock at $60 a share (option 1), straight bonds at 8 percent interest (option 2), preferred stock at 7 percent (option 3), and half common stock at $60 per share and half 8 percent bonds (option 4). For an expected EBIT level of $1 million after the expansion program, calculate the earnings per share for each of the alternative methods of financing. Assume a tax rate of 50 percent. Case let No. 4 Currently, the risk-free rate is 10 percent and the expected return on the market portfolio is 15 percent. Market analysts' return expectations for four stocks are listed here, together with each stock's expected beta. STOCK 1. Stillman Zinc Corporation 2. Union Paint Company 3. National Automobile Company 4. Parker Electronics, Inc. a. EXPECTED RETURN 17.0% 14.5 15.5 18.0 EXPECTED BETA 1.3 0.8 1.1 1.7 If the analysts' expectations are correct, which stocks (if any) are overvalued? Which (if any) are undervalued? b. If the risk-free rate were suddenly to rise to 12 percent and the expected return on the market portfolio to 16 percent, which stocks (if any) would be overvalued? Which (if any) undervalued? (Assume that the market analysts' return and beta expectations for our four stocks stay the same.)