Today , O ’ Grady Apparel Company is a small manufacturer of fabrics and clothing whose stock is traded in the OTC market . In 2015 , 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 2014 to $ 18.3 million in 2015 with earnings per share of $ 3.28 and $ 3.84 , respectively .
European sales represented 29 % of total sales in 2015 , up from 24 % the year before and only 3 % in 2010 , 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 2016 , and earnings per share are expected to rise to $ 4.40 . ( Selected income statement items are presented in Table 1 .)
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 2016 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 . A list of investment opportunities 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 .
TABLE 1 Selected Income Statement Items