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Arkansas Corporation
Balance Sheet
December 31, 2020
Assets
Current Assets
Cash ................................................................ $ 140,000
Marketable Securities ......................................... 80,000
Accounts Receivable (net) .................................. 500,000
Inventory ............................................................. 300,000
Total Current Assets ...................................................... $1,020,000
Investments ............................................................................................ 200,000
Net Plant & Equipment ......................................................................... 800,000
Total Assets ........................................................................................... $2,020,000
Liabilities
Current Liabilities
Accounts Payable .............................................. $ 540,000
Long-Term Liabilities
Bonds Payable ................................................... 800,000
Total Liabilities ...................................................................................... $ 1,340,000
Stockholders Equity
Preferred Stock, $25 par value ......................... 150,000
Common Stock, $1 par value ........................... 50,000
Capital Paid in excess of par ........................... 200,000
Retained Earnings ............................................ 280,000
Total Stockholders Equity ............................................ 680,000
Total Liabilities & Stockholders Equity .............................................. $2,020,000
Arkansas Corporation
Income Statement
For the Year Ending December 31, 2020
Sales (all on credit) ................................................................................. $ 4,800,000
Less: Cost of Goods Sold ........................................................... 3,100,000
Gross Profit ............................................................................................ 1,700,000
Less: Selling & Administrative Expenses* ................................ 1,000,000
Operating Profit (EBIT) ......................................................................... 700,000
Less: Interest Expense ............................................................... 70,000
Earnings Before Taxes (EBT) ............................................................... 630,000
Less: Taxes ................................................................................ 157,500
Earnings After Taxes (EAT) ................................................................ $ 472,500
* Includes $85,000 in lease expenses
Industry Ratio Averages:
Profitability Ratios:
Profit Margin 9.80%
ROA 21.00%
ROE 40.00%
Asset Utilization Ratios:
A/R Turnover 9.50x
Avg. Collection Period 40 days
Inventory Turnover 14.00x
Fixed Asset Turnover 5.50x
Total Asset Turnover 2.25x
Liquidity Ratios:
Current Ratio 1.75x
Quick Ratio 1.25x
Debt Utilization Ratios:
Debt to Total Assets 52.00%
Times Interest Earned 14.50x
Fixed Charge Coverage 7.20x
# of Common Shares Outstanding ...................................... 50,000
P/E Ratio ............................................................................. 25.35
Preferred Dividend (existing shares) .................................. $2.00
Market Yield for Preferred Stock ...................................... 7.00%
Costs: Variable = $3,000,000
Fixed = $1,100,000
Expected Common Dividend ............................................. $ 3.00
Common stock value growth rate ...................................... 7.50%
Bond Market Yield ............................................................ 6.00%
Preferred Floatation cost .................................................... $ 1.50
Preferred stock new issue price ......................................... $ 50.00
Capital Budgeting Opportunity Information
Initial Investment amount $600,000
Expected Cash Flows
Year 1 $100,000
Year 2 200,000
Year 3 200,000
Year 4 200,000
Information for Leverage Ratios
Quantity of Units 10,000
Price per unit $ 480
* Calculate the following:
NPV of the Capital Budgeting Opportunity using WACC.
Payback period of the Capital Budgeting Opportunity.
Price of one share of Preferred stock (existing shares).
Answer & Explanation
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