Question

In: Accounting

The last balance sheet of Lotus company is as follows Assets: Current Assets: 20 000 000...

The last balance sheet of Lotus company is as follows

Assets:

Current Assets: 20 000 000

Long-Term Assets: 80 000 000

Total Assets: 100 000 000

Liability and Equity

Account Payables: 4 000 000

Accrued Expenses: 1 000 000

Short-Term Loan: 15 000 000

Long Term Loan: 50 000 000

Equity as Common Stock: 30 000 000

Total Liab. and Equity: 100 000 000

This firm do not have any outstanding preferred stocks.

a) What is the total amount of financing used to finance the assets of this firm? (10 pts.)

b) What is the weight of debt and the weight of equity (common stock) in financing the assets of that firm? (20 pts.)

c) Assume that this firm has only one short term loan whose annual interest rate is 10% and only one long-term loan whose annual interest rate is 12%. What is the cost of debt for that firm if the corporate tax rate is 20% ? (20 pts)

d) This firm uses dividend discount method to find the cost of equity. What is the cost of equity if the expected dividend next year is $3 per share, if the current market value of Lotus shares is $30 per share and if firm expects an annual growth rate of 5% in future dividends? (25 pts)

e) What is the WACC (weighted average cost of capital) fort hat firm? (25 pts).

Note: You may use two or three decimals (e.g. 25.15) in your answers

Solutions

Expert Solution

Answer:-:

a.) Total amount of financing used to finance the assets of this firm:-

Short Term Loan 15000000
Long Term Loan 50000000
Equity as Common Stock 30000000
Total 95000000

b.) Weight of Debt and Equity in financing the assets of the firm:-

  • Weight of Debt = Long Term Loan+Short Term Loan/Total amount of financing used to finance the assets

= 50000000+15000000/95000000

= 68.42%

  • Weight of Equity = Equity/Total amount of financing used to finance the assets

= 30000000/95000000

= 31.58%

c.) Cost of Debt:-

Interest paid on short term loan = 15000000*10/100 = 1500000

Interest paid on long term loan = 50000000*12/100 = 6000000

Total Interest paid = 7500000

Effective Interest Rate = 7500000/65000000*100 = 11.54%

Cost of Debt (After-tax) = I(1-t) = 11.54(1-0.20) = 11.54(0.80)

= 9.23%

d.) Cost of Equity:-

Cost of Equity = D0(1+g)/P + g

where;

D0 = Dividend paid or expected to be paid = $3

g = Dividend Growth Rate = 5%

P = Market Price per share = $30

Cost of equity = 3(1+0.05)/30 + 0.05

= 3.15/30 + 0.05

= 0.105 + 0.05 = 0.155 = 15.50%

e.) WACC for the firm:-

Type Cost of Capital Weight WACC
Debt 9.23% 68.42%

6.32%

[9.23*68.42/100]
Equity 15.50% 31.58%

4.89%

[15.50*31.58/100]
Weighted Average Cost of Capital for the firm

11.21%

[6.32+4.89]

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Typical balance sheet classifications are as follows.      Current Assets                          &nbsp
Typical balance sheet classifications are as follows.      Current Assets                                                                              g.     Long-Term Liabilities      Investments and Funds                                                              h.     Capital Stock      Property, Plant and Equipment                                                 i.      Additional Paid-In Capital      Intangible Assets                                                                         j.      Retained Earnings      Other Assets                                                                                 k.     Notes to Financial Statements      Current Liabilities                                                                        l.      Not Reported on Balance Sheet Indicate by use of the above letters how each of the following items would be classified on a balance sheet prepared at December 31, 2014. If a contra...
The balance sheet for Bostick Corporation? follows: Ending balance Beginning balance ?Assets: Current? assets: Cash and...
The balance sheet for Bostick Corporation? follows: Ending balance Beginning balance ?Assets: Current? assets: Cash and cash equivalents $52,600 ?$44,600 Accounts receivable $18,300 ?$22,300 Inventory $48,500 ?$53,000 Total current assets $119,400 ?$119,900 ?Property, plant, and equipment ?$287,800 ?$275,300 Less accumulated depreciation $109,000 ?$101,550 Net? property, plant, and equipment $178,800 ?$173,750 Total assets $298,200 ?$293,650 Liabilities and? stockholders' equity: Current? liabilities: Accounts payable ?$26,030 ?$29,580 Wages payable ?$41,600 ?$47,100 Other accounts payable $42,200 ?$35,400 Notes payable ?$24,200 ?$25,200 Total current liabilities...
14-15 Lydex Company Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 980,000...
14-15 Lydex Company Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 980,000 $ 1,220,000 Marketable securities 0 300,000 Accounts receivable, net 2,780,000 1,880,000 Inventory 3,620,000 2,200,000 Prepaid expenses 260,000 200,000 Total current assets 7,640,000 5,800,000 Plant and equipment, net 9,560,000 9,070,000 Total assets $ 17,200,000 $ 14,870,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,030,000 $ 3,020,000 Note payable, 10% 3,680,000 3,080,000 Total liabilities 7,710,000 6,100,000 Stockholders' equity: Common stock, $75 par value 7,500,000 7,500,000...
14-16 5 Lydex Company Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $...
14-16 5 Lydex Company Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 1,020,000 $ 1,320,000 Marketable securities 0 300,000 Accounts receivable, net 2,940,000 2,040,000 Inventory 3,660,000 2,100,000 Prepaid expenses 270,000 210,000 Total current assets 7,890,000 5,970,000 Plant and equipment, net 9,640,000 9,110,000 Total assets $ 17,530,000 $ 15,080,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,070,000 $ 2,450,000 Note payable, 10% 3,700,000 3,100,000 Total liabilities 7,770,000 5,550,000 Stockholders' equity: Common stock, $75 par value 7,500,000...
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:    Current Assets...
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:    Current Assets Liabilities Cash $ 17,000 Accounts payable $ 19,000 Accounts receivable 22,000 Notes payable 27,000 Inventory 32,000 Bonds payable 57,000 Prepaid expenses 12,700 Fixed Assets Stockholders’ Equity Gross plant and equipment $ 257,000 Preferred stock $ 27,000 Less: Accumulated depreciation 51,400 Common stock 62,000 Paid in Capital 32,000 Net plant and equipment $ 205,600 Retained earnings 65,300 Total assets $ 289,300 Total liabilities and stockholders’...
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:    Current Assets...
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:    Current Assets Liabilities Cash $ 30,000 Accounts payable $ 32,000 Accounts receivable 35,000 Notes payable 40,000 Inventory 45,000 Bonds payable 70,000 Prepaid expenses 14,000 Fixed Assets Stockholders’ Equity Gross plant and equipment $ 270,000 Preferred stock $ 40,000 Less: Accumulated depreciation 54,000 Common stock 75,000 Paid in Capital 45,000 Net plant and equipment $ 216,000 Retained earnings 38,000 Total assets $ 340,000 Total liabilities and stockholders’...
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:    Current Assets...
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:    Current Assets Liabilities Cash $ 13,000 Accounts payable $ 15,000 Accounts receivable 18,000 Notes payable 23,000 Inventory 28,000 Bonds payable 53,000 Prepaid expenses 12,300 Fixed Assets Stockholders’ Equity Gross plant and equipment $ 253,000 Preferred stock $ 23,000 Less: Accumulated depreciation 50,600 Common stock 58,000 Paid in Capital 28,000 Net plant and equipment $ 202,400 Retained earnings 73,700 Total assets $ 273,700 Total liabilities and stockholders’...
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:    Current Assets...
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:    Current Assets Liabilities Cash $ 30,000 Accounts payable $ 32,000 Accounts receivable 35,000 Notes payable 40,000 Inventory 45,000 Bonds payable 70,000 Prepaid expenses 14,000 Fixed Assets Stockholders’ Equity Gross plant and equipment $ 270,000 Preferred stock $ 40,000 Less: Accumulated depreciation 54,000 Common stock 75,000 Paid in Capital 45,000 Net plant and equipment $ 216,000 Retained earnings 38,000 Total assets $ 340,000 Total liabilities and stockholders’...
Typical balance sheet classifications are as follows. a. Current Assets       b. Long-term Investments    ...
Typical balance sheet classifications are as follows. a. Current Assets       b. Long-term Investments     c. Property Plant & Equipment       d. Intangible Assets    e. Other Assets                   f. Current Liabilities            g. Long-Term Liabilities          h. Capital Stock            i. Additional Paid-In Capital        j. Retained Earnings                       k. Notes to Financial Statements Indicate by use of the above letters how each of the following items would be classified on a balance sheet prepared at December 31,...
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows: Current Assets Liabilities...
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows: Current Assets Liabilities Cash $ 15,000 Accounts payable $ 17,000 Accounts receivable 20,000 Notes payable 25,000 Inventory 30,000 Bonds payable 55,000 Prepaid expenses 12,500 Fixed Assets Stockholders’ Equity Gross plant and equipment $ 255,000 Preferred stock $ 25,000 Less: Accumulated depreciation 51,000 Common stock 60,000 Paid in Capital 30,000 Net plant and equipment $ 204,000 Retained earnings 69,500 Total assets $ 281,500 Total liabilities and stockholders’ equity...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT