#1.

Problem 3-21 Calculating EFN

The most recent financial statements for Crosby, Incorporated, appearbelow. Sales for 2022 are projected to grow by 25 percent. Interest expense will remain constant; the tax rate and the dividend payout rate also willremain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

CROSBY, INCORPORATED
2021 Income Statement
Sales		$ 760,000
Costs		595,000
Other expenses		31,000
Earnings before interest and taxes		$ 134,000
Interest expense		27,000
Taxable income		$ 107,000
Taxes (22%)		23,540
Net income		$ 83,460
Dividends	$ 25,038
Addition to retained earnings	58,422

CROSBY, INCORPORATED
Balance Sheet as of December 31, 2021
Assets		Liabilities and Owners' Equity
Current assets		Current liabilities
Cash	$ 21,940	Accounts payable	$ 56,100
Accounts receivable	44,880	Notes payable	15,300
Inventory	104,960	Total	$ 71,400
Total	$ 171,780	Long-term debt	$ 143,000
Fixed assets		Owners' equity
Net plant and equipment	$ 436,000	Common stock and paid-in surplus	$ 121,000
		Retained earnings	272,380
		Total	$ 393,380
Total assets	607,780	Total liabilities and owners' equity	$ 607,780

If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 25 percent growth rate in sales?(Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

#2.

Problem 16-9 Homemade Leverage and WACC

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $425,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $212,500 and the interest rate on its debt is 6 percent. Both firms expect EBIT to be $48,000. Ignore taxes.

a.	Richard owns $21,250 worth of XYZ's stock. What rate of return is he expecting?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	Suppose Richard invests in ABC Co. and uses homemade leverage to match his cash flow in part (a). Calculate his total cash flow and rate of return.(Do not round intermediate calculations. Enter your return answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c.	What is the cost of equity for ABC andXYZ?(Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
d.	What is the WACC for ABC and XYZ?(Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

#3.

Problem 16-24 Stock Value and Leverage

Taco Salad Manufacturing, Inc., plans to announce that it will issue $2.13 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 5 percent. The company is currently all-equity andworth $6.60 million with 196,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The annual pretax earnings of $1.37 million are expected to remain constant in perpetuity. Thetax rate is 21 percent.

a.	What is the expected return on the company's equity before the announcement of the debt issue?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	What is the price per share of the company's equity?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
d.	What is the company's stock price per share immediately after the repurchase announcement?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
e-1.	How many shares will the company repurchase as a result of the debt issue?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
e-2.	How many shares of common stock will remain after the repurchase?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
g.	What is the required return on the company's equity after the restructuring?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

#4.

Problem 16-22 Homemade Leverage

The Veblen Company and the Knight Company are identical in every respect except that Veblen is unlevered. The market value of Knight Company's 6 percent bonds is $1.6 million. Financial information for the two firms appears here. All earnings streams are perpetuities. Neither firm pays taxes. Both firms distribute all earnings available to common stockholders immediately.

		Veblen			Knight
Projected operating income	$	610,000		$	610,000
Year-end interest on debt					96,000
Market value of stock		4,400,000			3,550,000
Market value of debt					1,600,000

a-1.	What will the annual cash flow be to an investor who purchases 5 percent of Knight's equity?
a-2.	What is the annual net cash flow to the investor if 5 percent of Veblen's equity is purchased instead? Assume that borrowing occurs so that the net initial investment in each company is equal. The interest rate on debt is 6 percent per year.
	(For all requirements, enter your answer in dollars, not millions of dollars)