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 todays 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-1 would result in highest value for the investment and shareholders.

Table 1 - Relationship Between Spread, Bond Rating, and Capital Structure
D/E	Spread	Rating
0.00%	0.75%	AAA
5.00%	1.00%	AAA
10.00%	1.50%	AA
25.00%	2.00%	A
50.00%	5.75%	B+
75.00%	13.00%	CC
100.00%	25.00%	D

Financial Background

In the past, ITSC had earned pre-tax return of 14.953646% on its total assets and its last year EBIT (2007) was 14.953646%X ($1,134, 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 is the current interest coverage ratio?
3. What is the current cost of equity and WACC?
4. What are the interest coverage ratio for each proposed capital structure?
5. What are the EPS for each proposed capital structure?
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?
8. What is the optimal Capital Structure?
9. What is the new WACC for the Company with the new division?

Table Window Help Eta q. 2 Mon Nov 29 3:57 PM Word Fie Edit View insert Format Tools o.. Auto AE20 Home Insert Draw Design Layout References OP a International Tele-Space Corp - Compatibility Mode - Tell me Mailings Review View Share Comments Times Now. 11 VAA A . LA LO Paste dcWw ABCD MUUML alb DANDOCI Abdec AaBbccc MCDLOUW Cnshoob Housing Hlading? Horra rang Suht TH ND SANT Sitten . B i UuXK A. TE 22 Styles Pane Dictate Sonstity Edhor Taba. Cara merde ASEA Siers Price Mr CN PAE City LT Debt Total Deli 10 21 LYHYT USCITY 18.LO EZE 9:20 .4 1.93 BA $71.16 $55.00 BEAN $2699 $350 $ 3:21 5620 Es. SS582 $150 $7.00 B.IO. Enota bidia Deses . Eine Telades Corp Gerra cermin Herely 12.07 59.4 12.5% 12. 2x 16.6% 12 RX ..1 ..1 1 2792 4058 0329 7173 4189 HEI en 26 7323 IT SIMT 51100 3 4447 5102 3:23 .2 Locked Math Compost Humibalis CHF. Ilocal Clin Un test Trennum FI 121 UITM EZE 14.13 18.5x 1/5X . 12. W 1151 500.00 1 1.1.14 em 2 1 Table 3. Balance Sheet Cash & ST Investment Receivables is IN Inventory Fished Goods and in Progress Frogress Paris Oher Other Curemast Durrem AS-Toti 2037 LIABILITES 313,000,000 Accounts Payable $241,000.00 Shot Tamm Deb& Dument Fortion of Long Torm Debt $175,000,000 Accrued Parol (530,000 Uhr C.mert Us 547,000.000 Current Liabilities - Total $117.BUON ME Parisingu Realea midHAN $395,000,000 Other Locks 15218,200,000 Total Utilities $70,000.00 Capital Sup US $13.00 Utappides $261,000000 Rciales Eamings $127.000.000 Common Equity 51,134,000,000 Total abilities & Shareholders Equity 2007 $105050.000 $100.000 $70.000.000 SOY USC.CO $263.000.000 $184 USCUO 300.00 1987.000.000) 81270x2.000 SALTAR.000 8207 000.000 Property Fonts Equipment - Groce A... While Tangible Otheresets It Other Arts Property, Plant & EquipmentNet . - Other Aste Total Assets $384.000.000 $525.000 S1,134030002 Tabia - Income Sulamant Nilsen. Depreciation Deacon & metation Gross incom Sire. Ce dimin Ech sa Operating Incom. Caming later interest & Tress PRIIT) Irisreel Expenso Costi Freax 31 24,571,154 (51.100,000,000 (336,000,000 $12,114 3224,00200 4.000 DO $19,714 $16.725.UCU $152,548,184 Page 2 of 3 19578dward English Well 2 Slate PAUN -- + 134% 29 Table Window Help Eta q. 2 Mon Nov 29 3:57 PM Word Fie Edit View insert Format Tools o.. Auto AE20 Home Insert Draw Design Layout References OP a International Tele-Space Corp - Compatibility Mode - Tell me Mailings Review View Share Comments Times Now. 11 VAA A . LA LO Paste dcWw ABCD MUUML alb DANDOCI Abdec AaBbccc MCDLOUW Coches Hlading? Hermal Stang ST Sutta TH ND SANT Bro. B i UuXK A. TE 22 Styles Pane Dictate Sonstity Edhor har THERE Net Income After Tuces $5 BAR 154 5100,000,00 Talo Marron Trek Seats BE Benda 78. A Premium ex AX 1. Stocks, Bonds, e111s, and Inflation- 2005 Yearbook Market Reena for 1976-200. (Chongo: Tahotson Brostate, 2005). NO Page 3 of 3 18 of 784 RUNT English (Urid BLAH! : Focus 29 Table Window Help Eta q. 2 Mon Nov 29 3:57 PM Word Fie Edit View insert Format Tools o.. Auto AE20 Home Insert Draw Design Layout References OP a International Tele-Space Corp - Compatibility Mode - Tell me Mailings Review View Share Comments Times Now. 11 VAA A . LA LO Paste dcWw ABCD MUUML alb DANDOCI Abdec AaBbccc MCDLOUW Cnshoob Housing Hlading? Horra rang Suht TH ND SANT Sitten . B i UuXK A. TE 22 Styles Pane Dictate Sonstity Edhor Taba. Cara merde ASEA Siers Price Mr CN PAE City LT Debt Total Deli 10 21 LYHYT USCITY 18.LO EZE 9:20 .4 1.93 BA $71.16 $55.00 BEAN $2699 $350 $ 3:21 5620 Es. SS582 $150 $7.00 B.IO. Enota bidia Deses . Eine Telades Corp Gerra cermin Herely 12.07 59.4 12.5% 12. 2x 16.6% 12 RX ..1 ..1 1 2792 4058 0329 7173 4189 HEI en 26 7323 IT SIMT 51100 3 4447 5102 3:23 .2 Locked Math Compost Humibalis CHF. Ilocal Clin Un test Trennum FI 121 UITM EZE 14.13 18.5x 1/5X . 12. W 1151 500.00 1 1.1.14 em 2 1 Table 3. Balance Sheet Cash & ST Investment Receivables is IN Inventory Fished Goods and in Progress Frogress Paris Oher Other Curemast Durrem AS-Toti 2037 LIABILITES 313,000,000 Accounts Payable $241,000.00 Shot Tamm Deb& Dument Fortion of Long Torm Debt $175,000,000 Accrued Parol (530,000 Uhr C.mert Us 547,000.000 Current Liabilities - Total $117.BUON ME Parisingu Realea midHAN $395,000,000 Other Locks 15218,200,000 Total Utilities $70,000.00 Capital Sup US $13.00 Utappides $261,000000 Rciales Eamings $127.000.000 Common Equity 51,134,000,000 Total abilities & Shareholders Equity 2007 $105050.000 $100.000 $70.000.000 SOY USC.CO $263.000.000 $184 USCUO 300.00 1987.000.000) 81270x2.000 SALTAR.000 8207 000.000 Property Fonts Equipment - Groce A... While Tangible Otheresets It Other Arts Property, Plant & EquipmentNet . - Other Aste Total Assets $384.000.000 $525.000 S1,134030002 Tabia - Income Sulamant Nilsen. Depreciation Deacon & metation Gross incom Sire. Ce dimin Ech sa Operating Incom. Caming later interest & Tress PRIIT) Irisreel Expenso Costi Freax 31 24,571,154 (51.100,000,000 (336,000,000 $12,114 3224,00200 4.000 DO $19,714 $16.725.UCU $152,548,184 Page 2 of 3 19578dward English Well 2 Slate PAUN -- + 134% 29 Table Window Help Eta q. 2 Mon Nov 29 3:57 PM Word Fie Edit View insert Format Tools o.. Auto AE20 Home Insert Draw Design Layout References OP a International Tele-Space Corp - Compatibility Mode - Tell me Mailings Review View Share Comments Times Now. 11 VAA A . LA LO Paste dcWw ABCD MUUML alb DANDOCI Abdec AaBbccc MCDLOUW Coches Hlading? Hermal Stang ST Sutta TH ND SANT Bro. B i UuXK A. TE 22 Styles Pane Dictate Sonstity Edhor har THERE Net Income After Tuces $5 BAR 154 5100,000,00 Talo Marron Trek Seats BE Benda 78. A Premium ex AX 1. Stocks, Bonds, e111s, and Inflation- 2005 Yearbook Market Reena for 1976-200. (Chongo: Tahotson Brostate, 2005). NO Page 3 of 3 18 of 784 RUNT English (Urid BLAH! : Focus 29