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 2016

(b) What is the projected EPS with 10% sales growth?

You are a bit skeptical of the projected 10% growth in sales and decided 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) 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 1.4 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?

4

(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 2016
Sales	$43,000,000			Taxes:	40%
COGS	$30,000,000
Other expenses	$5,000,000			Shares Outstanding	1,000,000
Depreciation	$2,000,000			Market-to-Book Ratio	1.25
EBIT	$6,000,000
Interest	$2,000,000
Taxable income	$4,000,000
Taxes (40%)	$1,600,000
Net income	$2,400,000
Dividends	$600,000
Add to RE	$1,800,000
Balance Sheet, Dec 31, 2016
Assets				Liabilities & Owners Equity
Current Assets				Current Liabilities
Cash	$500,000			Accounts Payable	$1,000,000
Accounts Receivable	$1,000,000			Notes Payable	$3,000,000
Inventory	$2,000,000			Total CL	$4,000,000
Total CA	$3,500,000			Long Term Debt	$10,000,000
Fixed Assets				Owners Equity
Net PP&E	$25,000,000			Common Stock	$6,500,000
				Retained Earnings	$8,000,000
				Total Equity	$14,500,000
Total Assets	$28,500,000			Total L & OE	$28,500,000