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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%. 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 83%.

(g) What is your cost of debt?

(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?

Statements Income Statement 40% Sales COGS Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income $43,000,000 $30,000,000 $5,000,000 $2,000,000 $6,000,000 $2,000,000 $4,000,000 $1,600,000 $2.400.000 Taxes: Shares Outstanding Market-to-Book Ratio Depreciation of New Assets Dividend growth in the last 7 years 1,000,000 1.25 25.00% 8.00% Dividends Add to RE $600,000 $1,800,000 Balance Sheet Assets Current Assets Cash Accounts Receivable Inventory Total CA Fixed Assets Net PP&E $500,000 $1,000,000 $2,000,000 $3,500,000 Liabilities & Owners' Equity Current Liabilities Accounts Payable Notes Payable Total CL Long Term Debt Owners' Equity Common Stock Retained Earnings Total Equity Total L & OE $1,000,000 $3,000,000 $4,000,000 $10,000,000 $25,000,000 $6,500,000 $8,000,000 $14,500,000 $28,500,000 Total Assets $28,500,000

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