Q: The quarterly investors call is approaching and you were asked to comment on the EPS and projected EPS based on the growth forecast of 10%.

(a) Compute the EPS for the calendar year of 2015. (b) What is the projected EPS while making the follownig assumptions - a projected growth in sales of 10% and the firm is at capacity right now and any further growth would require an investment in fxed assets of $5 million dollars.

You are a bit skeptical of a projected 10% growth in sales and decide to look at a much less aggressive long-run growth scenario of 3.5% growth in sales.

(c) What is the projected EPS for a 3.5% growth in sales? If the dividend payout ratio remains the same, how much is paid per share?

As some external financing will be needed to accommodate any growth, you started looking into raising debt and/or equity. Since your company would be mostly described as a small-cap US company, you looked at market data to help you determine your costs of equity and debt.

(d) Using information from the attached image, what should be the risk premium for appropriate market for your company? Assume the risk free is given by 1mo Treasury Bills. (e) Looking at historical stock market data, you determined that your beta is roughly 1.5 with respect to the market benchmark you used above to compute the risk premium. What should your cost of equity be? (f) In order to get a little more comfortable with the number computed above, you decided to look at the cost of equity using the dividend growth corresponding to the 3.5% growth scenario from (c). What is the cost of equity using this approach?

In order to determine your cost of debt, you decided to look at your long term debt, which is structured as a single 20yr bond with semi-annual coupons, a coupon rate of 10%, and is currently trading at 105%.

(g) What is your cost of debt?

(h) What is your after-tax cost of debt?

Your CEO is interested in knowing what is the minimum return the company should generate to make sure investors are satisfied, but is not sure which number to focus on.

(i) What measure should you propose and how would you explain it to your CEO?

(j) What is the value for the proposed measure?

Income Statement 2015 40% Sales COGS Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income $43,000,000 $30,000,000 $5,000,000 $2,000,000 $6,000,000 $2,000,000 $4,000,000 Taxes Shares Outstanding 1,000,000 $1,600,000 $2,400,000 Dividends Add to RE $600,000 $1,800,000 Balance Sheet, Dec 31, 2015 Assets Liabilities & Owners' Equi Current Assets Current Liabilities Cash $500,000 Accounts Receivable $1,000,000 $2,000,000 $3,500,000 Notes Payable Total CL Long Term Debt Accounts Payable $1,000,000 $3,000,000 $4,000,000 $10,000,000 Inventory Total CA Fixed Assets Net PP&E Owners' Equity $25,000,000 Common Stock $6,500,000 Retained Earnings S8,000,000 Total Equity 14 500000 Total Assets $28,500,000 Total L & OE $28,500,000 Income Statement 2015 40% Sales COGS Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income $43,000,000 $30,000,000 $5,000,000 $2,000,000 $6,000,000 $2,000,000 $4,000,000 Taxes Shares Outstanding 1,000,000 $1,600,000 $2,400,000 Dividends Add to RE $600,000 $1,800,000 Balance Sheet, Dec 31, 2015 Assets Liabilities & Owners' Equi Current Assets Current Liabilities Cash $500,000 Accounts Receivable $1,000,000 $2,000,000 $3,500,000 Notes Payable Total CL Long Term Debt Accounts Payable $1,000,000 $3,000,000 $4,000,000 $10,000,000 Inventory Total CA Fixed Assets Net PP&E Owners' Equity $25,000,000 Common Stock $6,500,000 Retained Earnings S8,000,000 Total Equity 14 500000 Total Assets $28,500,000 Total L & OE $28,500,000