Determine the earnings after taxes and compute the percentage
As a member of the finance department of ranch manufacturing,
your supervisor has asked you to compute the discount rate to use
when evaluating the purchase of new packaging equipment for the
plant. Under the assumption that the firm’s present capital
structure reflects the appropriate mix of capital sources for the
firm, you have determined the market value of the firm’s capital
structure as follows:
Source of Capital Market Value
Preferred Stock 1,900,000
Common Stock 5,700,000
To finance the purchase, Ranch Manufacturing will sell 10-year
bonds paying 7.1% per year at the market price of $1,049. Preferred
stock paying a $1.99 dividend can be sold for $24.03. Common stock
for Ranch Manufacturing is currently selling for $54.84 per share
and the firm paid a $3.02 dividend last year. Dividends are
expected to continue growing at a rate of 5.2% 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? Ranch
manufacturing’s WACC is % (round to three decimal places).Firm A has $10,000 in assets entirely financed with equity. Firm
B also has $10,000 in assets, but these assets are financed by
$5,000 in debt (with a 10 percent rate of interest) and $5,000 in
equity. Both firms sell 10,000 units of output at $2.50 per unit.
The variable costs of production
are $1, and fixed production costs are $12,000. (To ease the
calculation, assume no income tax.)
a) What is the operating income (EBIT) for both
b) What are the earnings after interest?
c) If sales increase by 10 percent to 11,000 units, by
what percentage will each firm’s earnings after interest increase?
To answer the question, determine the earnings after taxes and
compute the percentage increase in these earnings from the answers
you derived in part b.
d) Why are the percentage changes different?