Norwich Industries, an established manufacturer of printing equipment, expects its sales to remain flat for the next three to five years due to both weak economic outlook and an expectation of little new printing technology development over that period. Base on that scenario the firms management has been instructed by the Board of directors to institute that will allow it to operate more efficiently, earn higher profits, and most important maximize shareholder wealth. In this regard, the firms chief financial officer (CFO), Ron Lewis, has been tasked to evaluate the firms capital structure, dividend policy, and possible capital projects. Currently the firm has a fixed total capital of $10, 000,000, which is made up of 10 percent debt and 90 percent equity. The firm has 100,000 outstanding ordinary shares and no preference shares. Although Lewis feels that the firms current policy of paying out 60 percent of each years earnings in dividends is appropriate, he believes that the current capital structure may lack adequate financial leverage. In order to evaluate the firm/s capital structure, Lewis is considering two alternative capital structures A (30 percent debt ratio) and B (50 percent debt ratio). The interest rate on current debt is 10 percent and is believed to remain the same. Lewis expects the firms current earnings before interest and taxes (EBIT) to remain at $1,200,000. The firm has a tax rate of 40 percent. Norwich is considering replacing one of its printers with either of two printers printer A or printer B. Printer A is highly automated, computer controlled; printer B is less expensive and uses standard technology. In order to analyze these alternatives, Lewis prepared estimates of the initial investment and the relevant incremental cash inflows associated with each printer. These are summarized in the following table:

Printer A	Printer B
Initial investments	$660,000	$360,000
Year	Profits after tax	Cash inflows	Profits after tax	Cash Inflows
1	$5,000	$128,000	$5,000	$88,000
2	10,000	182,000	15,000	120,000
3	20,000	166,000	10,000	96,000
4	65,000	168,000	20,000	86,000
5	210,000	450,000	100,000	207,000

Note that Lewis planned to analyze both printers over a five -year period. At the end of that time the printer will be sold, thus accounting for the large fifth-year cash inflow. Lewis decided to apply the firms 13 percent cost of capital when analyzing the printers. Norwich required a maximum payback period of 4.0 years. Suppose the following table summarizes the net present values and associated probabilities for the various outcomes for the two printer alternatives.

Net present value
Market outcome	Probability	Printer A	Printer B
Very poor	5%	-$6,000	$500
Poor	15%	2,000	4,500
Average	60%	8,500	8,000
Good	15%	15,000	12,500
Excellent	5%	23,000	16,500

(a) How much debt is used in the current and proposed capital structures? (b) What is the expected return on assets?

(c) Assuming that the share price stays the same, calculate the earnings per share for the

three financing alternatives. (d) What is the level of EBIT at the point of indifference? (e) Find the dividend cover for the three financing alternatives

(f)Use the payback period to access the acceptability and relative ranking of each printer. (g) Use the following capital budgeting techniques to access the acceptability and relative ranking of each printer:

(h) (i) (j)

Discounted payback period (DPP) Net present value (NPV) Profitability index (PI)

(k)Summarize the preferences indicated by the techniques used in (a) and (b) and indicate which printer you would recommend, if either, if the firm has (i) unlimited funds or (ii) capital rationing.

What the most likely NPVs? (l) Calculate the expected NPV for each printer. (m) Calculate the range of NPVs for each printer.

(n) Calculate the standard deviations of NPV for each printer. (o) Which printer has higher relative risk.