Integrative Case 4: O’Grady Apparel Company
O’Grady Apparel Company was founded nearly 160 years ago when an Irish merchant named Garrett O’Grady landed in Los Angeles with an inventory of heavy canvas, which he hoped to sell for tents and wagon covers to miners headed for the California goldfields. Instead, he turned to the sale of harder- wearing clothing. Today, O’Grady Apparel Company is a small manufacturer of fabrics and clothing whose stock is traded on the over- the-counter exchange. In 2012, the Los Angeles– based company experienced sharp increases in both domestic and European markets resulting in record earnings. Sales rose from $ 15.9 million in 2011 to $ 18.3 million in 2012 with earnings per share of $ 3.28 and $ 3.84, respectively. European sales represented 29% of total sales in 2012, up from 24% the year before and only 3% in 2001, 1 year after foreign operations were launched. Although foreign sales represent nearly one- third of total sales, the growth in the domestic market is expected to affect the company most markedly. Management expects sales to surpass $ 21 million in 2013, and earnings per share are expected to rise to $ 4.40. ( Selected income statement items are presented in Table 1.)
Table 1. Selected Income Statement Items
2010 2011 2012 Projected 2013
Net sales $ 13,860,000 $ 15,940,000 $ 18,330,000 $ 21,080,000
Net profits after taxes 1,520,000 1,750,000 2,020,000 2,323,000
Earnings per share ( EPS) 2.88 3.28 3.84 4.40
Dividends per share 1.15 1.31 1.54 1.76
Because of the recent growth, Margaret Jennings, the corporate treasurer, is concerned that available funds are not being used to their fullest potential. The projected $ 1,300,000 of internally generated 2013 funds is expected to be insufficient to meet the company’s expansion needs. Management has set a policy of maintaining the current capital structure proportions of 25% long- term debt, 10% preferred stock, and 65% common stock equity for at least the next 3 years. In addition, it plans to continue paying out 40% of its earnings as dividends. Total capital expenditures are yet to be determined.
Jennings has been presented with several competing investment opportunities by division and product managers. However, because funds are limited, choices of which projects to accept must be made. The investment opportunities schedule ( IOS) is shown in Table 2. To analyze the effect of the increased financing requirements on the weighted average cost of capital ( WACC), Jennings contacted a leading investment banking firm that provided the financing cost data given in Table 3. O’Grady is in the 40% tax bracket.
Investment Opportunities Schedule ( IOS)
Investment opportunity Internal rate of return ( IRR) Initial investment
A 21% $ 400,000
B 19 200,000
C 24 700,000
D 27 500,000
E 18 300,000
F 22 600,000
G 17 500,000
Financing Cost Data Long- term debt: The firm can raise $ 700,000 of additional debt by selling 10- year, $ 1,000, 12% annual interest rate bonds to net $ 970 after flotation costs. Any debt in excess of $ 700,000 will have a before- tax cost, kd, of 18%.
Preferred stock: Preferred stock, regardless of the amount sold, can be issued with a $ 60 par value and a 17% annual dividend rate. It will net $ 57 per share after flotation costs.
Common stock equity: The firm expects its dividends and earnings to continue to grow at a constant rate of 15% per year. The firm’s stock is currently selling for $ 20 per share. The firm expects to have $ 1,300,000 of available retained earnings. Once the retained earnings has been exhausted, the firm can raise additional funds by selling new common stock, netting $ 16 per share after under- pricing and flotation costs.
1. Over the relevant ranges noted in the following table, calculate the after- tax cost of each source of financing needed to complete the table.
Source of capital Range of new financing After- tax cost (%)
Long- term debt $ 0–$ 700,000 ___
$ 700,000 and above ___
Preferred stock $ 0 and above ___
Common stock equity $ 0–$ 1,300,000 ___
$ 1,300,000 and above ___
2. a. Determine the break points associated with each source of capital. b. Using the break points developed in part ( 1), determine each of the ranges of total new financing over which the firm’s weighted average cost of capital ( WACC) remains constant. c. Calculate the weighted average cost of capital for each range of total new financing.
3. a. Using your findings in part b( 3) with the investment opportunities schedule ( IOS), draw the firm’s weighted marginal cost of capital ( WMCC) schedule and the IOS on the same set of axes, with total new financing or investment on the x axis and weighted average cost of capital and IRR on the y axis. b. Which, if any, of the available investments would you recommend that the firm accept? Explain your answer.
4. a. Assuming that the specific financing costs do not change, what effect would a shift to a more highly leveraged capital structure consisting of 50% long- term debt, 10% preferred stock, and 40% common stock have on your previous findings? ( Note: Rework parts b and c using these capital structure weights.) b. Which capital structure— the original one or this one— seems better? Why?
5. a. What type of dividend policy does the firm appear to employ? Does it seem appropriate given the firm’s recent growth in sales and profits and given its current investment opportunities? b. Would you recommend an alternative dividend policy? Explain. How would this policy affect the investments recommended in part c( 2)?
Why Work with Us
Top Quality and Well-Researched Papers
We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.
Professional and Experienced Academic Writers
We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.
Free Unlimited Revisions
If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.
Prompt Delivery and 100% Money-Back-Guarantee
All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.
Original & Confidential
We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.
24/7 Customer Support
Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.
No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.
Admission Essays & Business Writing Help
An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.
Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.
If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.