$7,200,000 at 10% a) What would be wcC's EPS (1) under the old production process, (2) under the new process if it uses debt, and (3) under the new process if it uses common stock? Rand your answers to the nearest cent. 2. $ 3. $ - 5)At what unit sales level would we have the same EPS it under takes the investment and finances it with debt ar with stock? Rand your answer to the nearest whote cumber or units At what unit sales level would EPS= 0 under the three Production / financing setups - that is, under the old plan, the new plan with debt financing, and the new plan with stock finonang? Round your answer to the nearest whole number. units/New plan with debt financing- id plan:- units 23
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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Chapter 14 Homework
#7
Wingter communications Corporation (WCC) produces.
airpods that
and this year's
Sales are expected to be 440, por set,
440,000 units. Vanable
Production costs at present are $1,560,000 WCC has
$4, 800,000 of debt outstanding at on
14
the
stack
7% There are 240,000 shares of common
outstanding, and there is no preferred stock. The dividend
payout ratio is 70% and wee is in the 25% federal-plus-
state tax brucket. WCC is a small company with average
Sales of $25 million or less during the past 3 years, so it
is exempt from the interest deduction limitation.
**
The company is considering inves has $7,200,000 in new equipment.
Sales would not increase, but variable costs per wit would decline
35 20%. Also, fixed operating costs would increase from $1,560,000
to $1,800,000. WCC could raise the required capital by bomowing
$7,200,000 at 10%
a) What would be wcC's EPS (1) under the old production process,
(2) under the new process if it uses debt, and (3) under the new
process if it uses common stock? Rand your answers to the nearest cent.
2.$
3. $
5) At what unit sales level would wcc have the same EPS
it undertakes the investment and finances it with debt
assuming
or with stock? Round your answer to the nearest whate number
units
() At what unit sales level would EPS = 0 under the three
Production / froncing setups - that is, under the old plan, the
new plan with debt financing, and the new plan with stock financing?
Round your answer to the nearest whole sember
id plan: units / New plan with debt financing.
EPS Debt: $
EPS stock: $
PE
units 23
New plan with stuck financing.
units
d) on the basis of the analysis in parts a
through c, and given that operating leverage is
lower under the new setup, which plan is
the riskiest, which has the highest expected
EPS, and which would you recommend? Assume
that there is a fairls high probability of sales
falling as low as 250,000 units. Determine EPS pebt.
and EPSstock at that sales level to help
assess the riskiness of the two financing
plans. Negative values should be inclicated by
a minus sign. Rand
your answers to the
newest cent.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbcd2d27a-56f0-42f1-82ee-dc77a8a42b09%2F207e5153-7984-4195-99ca-99958e17144c%2F6n9825l_processed.jpeg&w=3840&q=75)
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