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Question;Source of Capital Market ValueBonds \$3,500,000Preferred Stock \$1,800,000Common Stock \$5,900,000;To finance the purchase, Ranch manufacturing will sell 10 year bonds paying 6.6% per year at the market price of \$1031. Preferred stock paying a \$1.95 dividend can be sold for \$25.53. Common stock for Ranch Manufacturing is currently selling for \$54.38 per share and the firm paid a \$2.98 dividend last year. Dividends are expected to continue growing at a rate of 5.4% per year into the indefinite future. If the firm's tax rate is 30%, what discount rate should you use to evaluate the equipment purchase?;Plan A is an all-common-equity structure in which \$2.3 million dollars would be raised by selling 80,000 shares of common stock.;Plan B: would involve issuing \$1.2 million dollars in long-term bonds with an effective interest rate of 11.7% plus \$1.1 million would be raised by selling 40,000 shares of common stock. The debt funds raised under plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm's capital structure.;Abe and is partners plan to use a 34% tax rate in their analysis, and they have hired you on a consulting basis to do the following:a. Find the EBIT indifference level associated with two financing plans.b. Prepare a pre forma income statement for the EBIT level solved for in part a. that shows EPS will be the same regardless whether plan a or b is chosen.;Plan A: is an all-common-equity capital structure. \$2.1 million dollars would be raised by selling common stock at \$10 per common share.;Plan B: involves the use of financial leverage. \$1.1 million dollars would be raised by selling bonds with an effective interest rate of 11.3% (per annum), and the remaining \$1.0 million would be raised by selling common stock at the \$10 price per share. The use of financial leverage is considered to be a permanent part of the firm's capitalization, so no fixed maturity date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis." a. Find the EBIT indifference level associated with two financing plans.B. A detailed financial analysis of the firm's prospects suggest that the long-term EBIT will be above \$323,000 annually. Taking this into consideration, which plan will generate the higher EPS?;Crypton Electronics has a capital structure consisting of 44% common stock and 56% debt. A debt issue of \$1000 par value, 5.7% bonds that mature in 15 years and pay annual interest will sell for \$975. Common stock of the firm is currently selling for \$29.45 per share and the firm expects to pay a \$2.21 dividend next year. Dividends have grown at the rate of 5.1% per year and are expected to continue to do so for the foreseeable future. What is Cyrpton's cost of capital where the firm's tax rate is 30%.

Paper#43736 | Written in 18-Jul-2015

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