O’grady apparel company was founded nearly 160 years ago when an

  

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)?

Order a unique copy of this paper
(550 words)

Approximate price: $22

Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

We value our customers and so we ensure that what we do is 100% original..
With us you are guaranteed of quality work done by our qualified experts.Your information and everything that you do with us is kept completely confidential.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

The Product ordered is guaranteed to be original. Orders are checked by the most advanced anti-plagiarism software in the market to assure that the Product is 100% original. The Company has a zero tolerance policy for plagiarism.

Read more

Free-revision policy

The Free Revision policy is a courtesy service that the Company provides to help ensure Customer’s total satisfaction with the completed Order. To receive free revision the Company requires that the Customer provide the request within fourteen (14) days from the first completion date and within a period of thirty (30) days for dissertations.

Read more

Privacy policy

The Company is committed to protect the privacy of the Customer and it will never resell or share any of Customer’s personal information, including credit card data, with any third party. All the online transactions are processed through the secure and reliable online payment systems.

Read more

Fair-cooperation guarantee

By placing an order with us, you agree to the service we provide. We will endear to do all that it takes to deliver a comprehensive paper as per your requirements. We also count on your cooperation to ensure that we deliver on this mandate.

Read more

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency