9-14

WACC-Book weights and market weights Webster Company has compiled the information shown in the following table.

Source of capital               Book Value        Market Value        After-Tax cost

Long-term debt                $4,000,000           $3,840,000                    6.0%

Preferred Stock                      40,000                   60,000                     13.0

Common stock equity         1,060,000             3,000,000                   17.0

    Totals                              $5,100,000          $6,900,000

 

a.       Calculate the weighted average cost of capital using book value weights.

b.      Calculate the weighted average cost of capital using market value weights.

c.       Compare the answers obtained in parts a and b. Explained the differences.

 

4-6

Finding Operating and free Cash Flows: Consider the balance sheets and selected data from the income statement of Keith Corporation that appear below.

Keith Corporation Balance Sheets

                           December 31

Assets                                                                                         2012                        2011    

Cash                                                                                     $1,500                        $1,000    

Marketable securities                                                             1,800                          1,200

Accounts receivable                                                               2,000                          1,800

Inventories                                                                             2,900                          2,800

            Total current assets                                                   $8,200                        $6,800

Gross Fixed Assets                                                               $29,500                      $28,100

Less: Accumulated depreciation                                            14,700                         13,100

            Net fixed assets                                                         $14,800                      $15,100

            Total Assets                                                              $23,000                      $21,800             

Liabilities and Stockholder’s Equity

Accounts Payable                                                               $1,600                        $1,500

Notes Payable                                                                       2,800                          2,200

Accruals                                                                                   200                            300

            Total Current Liabilities                                         $4,600                          $4,000

Long-term debt                                                                     5,000                            5,000

Total liabilities                                                       $9,600                           $9,000

Common stock                                                                  $10,000                        $10,000

Retained Earnings                                                                 3,400                            2,800

Total stockholder’s equity                                                  $13,400                        $12,800

Total liabilities and stockholder equity                               $23,000                       $21,800

 

Keith Corporation Income State Data 2012

Depreciation                                                                     $1,600

Earnings before interest and taxes (EBIT)                        2,700

Interest Expense                                                                   367

Net profits after taxes                                                          1,400

Tax rate                                                                                  40%

a.       Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended December 31, 2012.

b.      Calculate the firm’s operating cash flow (OCF) for the year ended December 31, 2012.

c.       Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2012.

d.      Interpret, compare, and contrast your cash flow estimates in parts b and c.                                                                                                                                                             

 

                          

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