18 Jun A+ Work Main
General Energy Storage Systems
General Energy Storage Systems (GESS) was founded in 2002 by Ian Redoks, a Ph.D. candidate in physics who was interested in “outside-the-box” solutions to the problem of storing electrical energy. Redoks had obtained several patents with potential applications for plug-in hybrid cars, off-grid home electrical systems, and large-scale storage of commercial electricity, produced by conventional means from excess capacity at off-peak hours or from non-fossil-fuel sources such as solar power and wind power.
The timeliness of Redoks’s research has quickly attracted investors. For example, GESS has won contracts from an automobile company to manufacture batteries for a limited-production plug-in hybrid. It is also ready to begin commercial production of storage components for off-grid home electrical systems. More product means more storage space, however. To acquire the necessary manufacturing facilities, GESS needs to obtain additional financing.
Up to this point, GESS’s primary source of funds had been form the sale of stock. The company is entirely equity-financed except for current liabilities incurred in the course of day-to-day operations. There are 200,000 shares outstanding, which are mostly owned by large, diverse technology companies that may wish to partner with or even acquire GESS at some point in the future. The shares trade occasionally in the NASDAQ over-the-counter market at an average price of $20.00.
The investment bankers who placed the stock have suggested that an all-debt plan would minimize taxes, but it would be risky and leave little room for future borrowing. Instead, they recommend staying close to the industry averages for debt-to-assets and debt-to-equity ratios. They have proposed two alternative plans:
Plan A calls for $2,000,000 of new equity (100,000 new shares at the firm’s current stock price of approximately $20.00) and $4,000,000 of privately placed debt at 9%.
Plan B calls for $4,000,000 of new equity (200,000 new shares at the current stock price of $20.00) and $2,000,000 of privately placed debt at 8%
Under either plan, GESS’s combined state and federal marginal tax rate will be 40%.
Required:
Why should GESS expect to pay a higher rate of interest if it borrows $4,000,000 rather than $2,000,000?
Estimate earnings per share for Plan A and Plan B at EBIT levels of $800,000, $1,000,000 and $1,200,000.
At what level of EBIT would EPS be the same under either plan?
Suppose GESS’s management is fairly confident the EBIT will be at least $1,000,000. Which plan would the firm be most likely to choose?
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Writedemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.