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[answered] MBA 655 Quiz 4 General Energy Storage Systems General Energ

? I need the answers for this case study please...I know for a fact that my 2nd answer is if you can redo it with the right answers. Thank you. It is for MBA finance class.

MBA 655


Quiz 4


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-thecounter market at an average price of $20.00.


The investment bankers who placed the stock have suggested that an alldebt 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:


a. 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%.


b. 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: 1. Why should GESS expect to pay a higher rate of interest if it borrows


$4,000,000 rather than $2,000,000?


2. Estimate earnings per share for Plan A and Plan B at EBIT levels of


$800,000, $1,000,000 and $1,200,000.


3. At what level of EBIT would EPS be the same under either plan?


4. 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? 1) Interest on debt would be higher for higher amounts as risks are more with




Financial leverage; i.e.: higher debt ratio. Hence, the firm has to pay higher interest for a


higher loan.






$800000 EBIT of $1000000 EBIT of $1200000 Plan A Plan B Plan A Plan B Plan A Plan B EBIT 80000


0 80000


0 100000


0 100000


0 120000


0 120000


0 Interest 36000


0 16000


0 360000 160000 360000 160000 EBT 44000


0 64000


0 640000 840000 840000 104000


0 Tax at 40% 17600


0 25600


0 256000 336000 336000 416000 Net Income 26400


0 38400


0 384000 504000 504000 624000 # shares 10000


0 20000


0 100000 200000 100000 200000 EPS 2.64 1.92 3.84 2.52 5.04 3.12 3) EPS would be same




(E-360000)*0.6/100000 = (E-160000)*0.6/200000, where E is the EBIT level to


be found out.


(E-360000)*0.6 = (E160000)*0.3


2E - 720000 = E 160000


E = $560000








Plan A Plan B EBIT 56000


0 56000


0 Interest 36000


0 16000


0 EBT 20000


0 40000


0 Tax at 40% 80000 16000


0 Net Income 12000


0 24000


0 # shares 10000


0 20000


0 EPS 1.2 1.2 4) The firm will choose Plan A, as the EPS will be more. The EBIT level for equal


EPS is $560000.


If the expected EBIT is beyond this level, the plan with more debt will yield


higher EPS.


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