The Collins Company, expertly run by Mr. Collins who is the CEO, CFO, and Chairman of the Board, on which a couple of his very good friends sit, needs to expand its production. Current sales are $6,700,000 and that is expected to grow by 30% next year. Its current machines are operating at 92% of capacity. The supplier of machines has the X-1500 for sale, which can generate $1,000,000 worth of sales in a year. The Balance Sheet of the Collins Company has $9,000,000 in assets and $150,000 in Account Payable. It is financed for 50% using equity, in the form of 30,000 Common Stock outstanding. Preferred Stock represents 12.5% of the capital, in the form of 16,667 Preferred Stock outstanding. Finally, there is $275,000 in retained earnings on the Balance Sheet. According to the Income Statement the firm had a taxable income of $312,667, over which it paid $78,167 in taxes. From the resulting Net Income it paid a total of $25,000 of Preferred Stock dividend. Last year the firm paid $0.29 each quarter on the Common Stock outstanding, which is expected to grow next year to $0.30 each quarter. Note: When determining the Dividend Payout Ratio you need to combine the Preferred Stock dividend and the Common Stock dividend. The current Common Stock price is $18.05 and the beta associated with the stock is -0.8. The current Preferred Stock price is $21.62. It has callable bonds outstanding, which were issued in February 2012, with a maturity of 20 years. They can be called in February 2024 with a call premium of 4% of the Par Value. They currently trade at 102.5% of Par Value and have an interest rate of 6%. New bonds will be issued with a maturity of 15 years. The current risk-free rate of return is 3.5%, while the market has historically had a return of 12%.

Question 16: Do you believe that there is a Principal/Agent problem in the Collins Company? Explain.