looking for indepth solution all working
MENG 6502 Coursework Assignment 5. Issued: April 4, 2015. Due: April 17, 2015. This assignment carries 7/25 coursework marks for this course Hardy Apparel Company 2015 Hardy Apparel Company is a small manufacturer of fabrics and clothing whose stock is traded in the OTC market. The company has experienced steady increases in both domestic and foreign markets resulting in record earnings. This growth is projected to continue for several years into the future with the domestic markets providing even more significant growth. Table 1 summarizes pertinent financial data. Because of the recent growth, Sally Jones, the Financial Manager, is concerned that available funds are not being used to obtain the maximum returns. The projected $ 3.6 million of internally generated funds in 2015 will not be sufficient to meet the company's expansion needs. Management has set a policy of maintaining the current capital structure proportions of 40% long-term debt, 10% preferred stock, and 50% common stock equity for the next few years. In addition, Management plans to maintain its current dividend policy. Total capital expenditures are yet to be determined. Jones has been presented with several competing investment opportunities by divisional product managers. Furthermore, because funds are limited, choices of which projects to accept must be made. A list of investment opportunities is shown in Table 2. To analyse the effect of the increased financing requirements on the weighted average cost of capital (WACC), Jones has obtained from a leading investment banker the financing cost data given in Table 3. The company is in the 40% tax bracket. Required: 1. Over the relevant ranges, calculate the after-tax cost of each source of financing needed 2(a.) Determine the break points associated with each source of financing. (b). Using the break points developed in part 2(a), determine each of the ranges of total new financing over which the firm's weighted average cost of capital (WACC) remains constant. (c.) Calculate the weighted average cost of capital for each range of total new financing. 3(a). (b). Draw a graph with the WACC on the vertical axis and total financing on the horizontal axis. Plot the Investment Opportunity Schedule on the same graph. Which of the available investments would you recommend that the company accept? Explain your answer. 4(a). Assuming that the specific financing costs do not change, re-calculate the marginal WACC with a shift to a more leveraged capital structure consisting of 50% long term debt, 10% preferred stock, and 40% common stock.. Which of the available investments would you recommend that the company accept under the revised capital structure? (b). Which capital structure-the original one or the revised one seems better? Why? Why not? 5(a). (b). What type of dividend policy does the firm appear to employ? Does it seem appropriate given the firm's recent growth in sales and profits and given its current investment opportunities? Would you recommend an alternative dividend policy? Explain. How would this policy affect the investments recommended in part 3(b)? Table 1 Selected Financial Data ($ '000) Item 2010 2011 2012 2013 2014 Projected 2015 Net Sales $ 22,200 $ 26,800 $ 30,900 $ 35,300 $ 40,700 $ 47,500 Net Profits $ 2,450 $ 3,210 $ 3,720 $ 4,250 $ 4,980 $ 6,000 Earnings per Share $ 4.90 $ 6.42 $ 7.44 $ 8.50 $ 9.96 $ 12.00 Dividends per Share S 1.96 $2.56 $ 2.97 $ 3.40 $ 3.98 $ 4.80 Table 2 Investment Opportunities Investment Opportunity IRR Initial Investment P1 19.6% P2 21.00 800,000 P3 17.70 700,000 P4 18.70 600,000 P5 21.50 1,000,000 P6 16.00 1,500,000 P7 20.30 500,000 P8 18.00 400,000 $ 1,500,000 Table 3 Financing Cost Data Long -term Debt The company can raise up to $800,000 by selling additional 10 year, 14% Bonds with a face value of $1000 and floatation costs of $50. Any additional debt will have an estimated before-tax cost of 18% Preferred Stock Preferred stock up to $500,000 can be obtained by selling 15% Preferred stock with a face value of $100 and floatation cost of $15. Any additional preferred stock will cost 19%. Common Stock Common stock are currently priced at $100 per share. The company expects to have $3.6 million in retained earnings, New common stock can be sold with a discount of $10 and a floatation cost of 10%
