Question $3$

As the quarterly investors' call draws near, you've been tasked with providing insights on both the current Earnings Per Share $($EPS$)$ and the projected EPS, taking

into account the forecasted growth of $10\%.$

a$.$ Compute the EPS for the current year

b$.$ What is the projected EPS, assuming the same scenario as in Question $1?$

There's some skepticism regarding the forecasted $10\%$ sales growth so$,$ after a discussion with the CEO, you opted to examine a more conservative long$-$term

growth scenario, considering a $3\mathrm{.}5\%$ increase in sales instead.

c$.$ What is the projected EPS if you assume a $3\mathrm{.}5\%$ growth in sales? Assuming a similar dividend payout ratio, how much is paid per share?

Since there's a necessity for external financing to accommodate potential growth, you've initiated the process of exploring options for raising both debt and$/$or

equity. Given that your company is primarily categorized as a small$-$cap US firm, you've turned to market data to assist in assessing the costs associated with

equity and debt.

d$.$ What should be the risk premium for appropriate market for your company, assuming the risk free is given by $1mo$ Treasury Bills? Use the graph on slide $9$

from Week $6$ to determine the relevant market performance numbers.

e$.$ Upon analyzing historical stock market data, you've concluded that your beta is approximately $1\mathrm{.}4$ in relation to the market benchmark used earlier to

calculate the risk premium. What would be the appropriate cost of equity in this scenario?

f$.$ To gain further confidence in the computed figure mentioned earlier, you've chosen to examine the cost of equity using the dividend growth corresponding to

the $3\mathrm{.}5\%$ sales growth scenario from $($c$).$ If you opt to utilize the average dividend growth value from the last $8$ years, what would be the cost of equity using

this method? Do you believe this figure is dependable? If yes, why? If not, why not?

To ascertain your cost of debt, you've chosen to examine your long$-$term debt structure, which comprises a single $20-$year bond with semi$-$annual coupons. This

bond carries a coupon rate of $10\%$ and is presently trading at $83\%$ of its face value.

g$.$ Determine the cost of debt

h$.$ What is the after$-$tax cost of debt?

Your CEO is keen on understanding the minimum return required for the company to ensure investor satisfaction but is uncertain about which metric to prioritize.

i$.$ What measure should you propose and how would you explain it to your CEO?

j$.$ What is the value for the proposed measure?