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# Financing Alternatives: Analyzing Financial Data

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Can someone please help me with this. I'm confused and don't even know where to begin! I've calculated the debt ratio and got 39%. Is this correct? Here's the problem: Laurel Street, president of Uvalde Manufacturing Inc. is preparing a proposal to present to her board of directors regarding a planned plant expansion that will cost \$10 million. At issue is whether the expansion should be financed with debt (a long-term note at First National Bank of Uvalde with an interest rate of 15%) or through the issuance of common stock (200,000 shares at \$50 per share).

Uvalde Manufacturing currently has a capital structure of:
Debt (12% interest) 40,000,000
Equity 50,000,000
The firm's most recent income statement is presented next:
Sales \$100,000,000
Cost of goods sold 65,000,000
Gross profit 35,000,000
Operating expenses 20,000,000
Operating profit 15,000,000
Interest expense 4,800,000
Earnings before tax 10,200,000
Income tax expense (40%) 4,080,000
Net income \$ 6,120,000
Earnings per share (800,000 shares) \$ 7.65
Laurel Street is aware that financing the expansion with debt will increase risk but could also benefit shareholders through financial leverage. Estimates are that the plant expansion will increase operating profit by 20%.The tax rate is expected to stay at 40%.Assume a 100% dividend payout ratio.

a. Calculate the debt ratio, time interest earned, earnings per share, and the financial leverage index under each alternative, assuming the expected increase in operating profit is realized.
b. Discuss the factors the board should consider in making a decision.

#### Solution Summary

The solution provides calculations for the financial ratios and explains how to decide between financing alternatives,

\$2.19

## Apply Financial Analysis Concepts and Techniques

See attached file

"After-Tax Cost of Debt" L.L. Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8%. L.L. belives it could issue new bonds at par that would
provide a similair yield to maturity. If its marginal tax rate is 35%, what is L.L.'s after tax cost of debt?

(Note: input the correct data and use the appropriate formula in the answer cell)

Include an explanation of how cost of capital financing techniques affect the organization:

"NPV"

A project has an initial cost of \$52,125, expected net cash inflows of \$12,000 per year for 8 years and a cost of capital of 12%. What is the projects NPV? (Hint begin by constructing a time line.)

RATE (Discount Rate)
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8

Include an explanation of how to use capital budgeting and relevant cash flow to compare investment alternatives:

Ethier Enterprise has an unlevered beta of 1.o. Ethier is financed with 50% debt and has a levered beta of 1.6.
If the risk -free rate is 5.5% and the market risk premium is 6%, how much is the additional premium that Ethier's
shareholders require to be compensated for?

Given Data:
Unlevered Beta: 1.00
Levered Beta: 1.60
Risk-Free Rate: 5.50%
Debt 50%
Equity 50%

Step 1: Calculate the Required Return if the company had no debt:

(Input data and appropriate formula in the answer cell)

Step 2: Calculate the Required Return if the company has debt:

(Input data and appropriate formula in the answer cell)

Step 3: Calculate the extra premium for taking on financial risk:

Include an explanation of how varying degrees of financial risk may command variations in shareholder return expectations

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