Financial Ratios
Part A
After-TAX Cost Debt
O’Grandy Apparel Company can calculate the after tax debt cost using YTM (CP + (FV-Nd /n) / FV +Nd /2) *2. Cp is (0.12/2) * 1000= 60 Semi-annually Fv is 1000 Nd is 995 – (0.025* 1000) = 970
N is 20*2 because it is semi-annually then you have to use Kdt= Kd+ (i-T) .The tax bracket is 40 percent. Now we can have the after tax debt when it is equal or smaller than $700000
Kd ( 1-T) = 0.1249 (1-0.4)= 0.07494. If it is more than $700000 it will be KD (1-t) = 0.18(1-0.4) = 0.108
The Cost of Preferred Equity
If o’grady Apparel Company wants to raise financing using preferred shares, it could use Po = D/K KPS=D/Pn . so, 17% annual dividend rate times $60 (stated value) which is Dt is 10.2. After that 10.2 divided by $57 which gives us 0.1789.After tax cost of preferred shares.
The Cost of Common Equity
If the company needs to make the cost of common equity it has to use Po = D/(k-g) or K = D1/(Pn+g) so, the dividends per share in 2009 is 1.76. After tax cost of equity externally generated is
Kex = (D1/Pn) +g . D1 is 1.79 divided by 16P0 than plus 0.15g equal 0.26. 0.238 after tax cost of equity internally generated D1 is 1.79 divided by 20 P0 than plus 0.15 equity 0.238.
Finance Case: O’Grady Apparel Company
Part B
The break point is the level of financing at which the cost of a component of financing increases (Principles of Corporate Finance pg. 525).
The break point for the available reinvested profits of $1,300,000 is found by dividing it by its respective common equity capital structure weight of 65% with a result of $2 million. The available $700,000 in additional debt has a break point of $2,800,000 (see exhibit 2).
The weighted average cost of capital is found by way of weighting each capital resource by its fraction of the organization’s capital structure (Principles of Corporate Finance pg. 521).
The ranges that result from these break points cause the weighted average cost of capital to be 19.14% in the range
After-TAX Cost Debt
O’Grandy Apparel Company can calculate the after tax debt cost using YTM (CP + (FV-Nd /n) / FV +Nd /2) *2. Cp is (0.12/2) * 1000= 60 Semi-annually Fv is 1000 Nd is 995 – (0.025* 1000) = 970
N is 20*2 because it is semi-annually then you have to use Kdt= Kd+ (i-T) .The tax bracket is 40 percent. Now we can have the after tax debt when it is equal or smaller than $700000
Kd ( 1-T) = 0.1249 (1-0.4)= 0.07494. If it is more than $700000 it will be KD (1-t) = 0.18(1-0.4) = 0.108
The Cost of Preferred Equity
If o’grady Apparel Company wants to raise financing using preferred shares, it could use Po = D/K KPS=D/Pn . so, 17% annual dividend rate times $60 (stated value) which is Dt is 10.2. After that 10.2 divided by $57 which gives us 0.1789.After tax cost of preferred shares.
The Cost of Common Equity
If the company needs to make the cost of common equity it has to use Po = D/(k-g) or K = D1/(Pn+g) so, the dividends per share in 2009 is 1.76. After tax cost of equity externally generated is
Kex = (D1/Pn) +g . D1 is 1.79 divided by 16P0 than plus 0.15g equal 0.26. 0.238 after tax cost of equity internally generated D1 is 1.79 divided by 20 P0 than plus 0.15 equity 0.238.
Finance Case: O’Grady Apparel Company
Part B
The break point is the level of financing at which the cost of a component of financing increases (Principles of Corporate Finance pg. 525).
The break point for the available reinvested profits of $1,300,000 is found by dividing it by its respective common equity capital structure weight of 65% with a result of $2 million. The available $700,000 in additional debt has a break point of $2,800,000 (see exhibit 2).
The weighted average cost of capital is found by way of weighting each capital resource by its fraction of the organization’s capital structure (Principles of Corporate Finance pg. 521).
The ranges that result from these break points cause the weighted average cost of capital to be 19.14% in the range