The following are balance sheets for the Genatron Manufacturing Corporation for
ID: 2671991 • Letter: T
Question
The following are balance sheets for the Genatron Manufacturing Corporation for the years 2010 and 2011:BALANCE SHEET 2010 2011
Cash $50,000 $40,000
Accounts receivable $200,000 $260,000
Inventory $450,000 $500,000
Total current assets $700,000 $800,000
Fixed assets (net) $300,000 $400,000
Total assets $1,000,000 $1,200,000
Bank loan, 10% $90,000 $90,000
Accounts payable $130,000 $170,000
Accruals $50,000 $70,000
Total current liabilities $270,000 $330,000
Long-term debt, 12% $300,000 $400,000
Common stock, $10 par $300,000 $300,000
Capital surplus $50,000 $50,000
Retained earnings $80,000 $120,000
Total liabilities and equity $1,000,000 $1,200,000
a. Calculate the weighted average cost of capital based on book value weights. Assume an after-tax cost of new debt of 8.6 percent and a cost of common equity of 16.5 percent.
b. The current market value of Genatron
Explanation / Answer
With this examples which is given below now u can solve your problem easily and u will never forget that . try this i have given all the examples how to calculate and how to do it . Most accounting balance sheets classify a company's assets and liabilities into distinctive groupings such as Current Assets; Property, Plant, and Equipment; Current Liabilities; etc. These classifications make the balance sheet more useful. The following balance sheet example is a classified balance sheet. Sample Balance Sheet: Example Company Balance Sheet December 31, 2010 ASSETS LIABILITIES Current Assets Current Liabilities Cash $ 2,100 Notes Payable $ 5,000 Petty Cash 100 Accounts Payable 35,900 Temporary Investments 10,000 Wages Payable 8,500 Accounts Receivable - net 40,500 Interest Payable 2,900 Inventory 31,000 Taxes Payable 6,100 Supplies 3,800 Warranty Liability 1,100 Prepaid Insurance 1,500 Unearned Revenues 1,500 Total Current Assets 89,000 Total Current Liabilities 61,000 - Investments 36,000 Long-term Liabilities Notes Payable 20,000 Property, Plant & Equipment Bonds Payable 400,000 Land 5,500 Total Long-term Liabilities 420,000 Land Improvements 6,500 Buildings 180,000 Equipment 201,000 Total Liabilities 481,000 Less: Accum Depreciation (56,000) Prop, Plant & Equip - net 337,000 - Intangible Assets STOCKHOLDERS' EQUITY Goodwill 105,000 Common Stock 110,000 Trade Names 200,000 Retained Earnings 229,000 Total Intangible Assets 305,000 Less: Treasury Stock (50,000) Total Stockholders' Equity 289,000 Other Assets 3,000 ------------------------------------------- ---------------------------------------------------- Total Assets $770,000 Total Liab. & Stockholders' Equity $770,000 -------------------------------------------------------------------------------------------------- EXAMPLE HOW TO Calculate the weighted average cost of capital based on book value weights Weighted-Average Number of Shares of Common Stock Since the earnings occurred throughout the entire year, we need to divide them by the number of shares that were outstanding throughout the entire year. During the first four months only 600 shares were outstanding, during the next five months 1,500 shares were outstanding, and for the final three months of the year 2,000 shares of common stock were outstanding. This situation requires that we come up with an average number of shares of common stock for the year. Shares of Common Outstanding Months Outstanding No. of Months Divided by 12 Weighted Average No. of Common Shares 600 Jan, Feb, Mar, Apr 4/12 200 1,500 May, Jun, Jul, Aug, Sep 5/12 625 2,000 Oct, Nov, Dec 3/12 500 1,325 As the calculation shows, the weighted-average number of shares of common stock for the year was 1,325. It's a good idea to test this answer to be sure it's reasonable. During five of the months (May - Sep.) the number of shares of common stock outstanding was 1,500 shares. During the remainder of the year, there were more months with less than 1,500 shares outstanding. Thus, the figure of 1,325 looks reasonable. Earnings per Share of Common Stock After recognizing the preferred stockholders' required dividend, there was $7,300 ($10,000 minus $2,700) of earnings available for the common stockholders. The $7,300 was earned throughout the year, so we need to divide that amount by the weighted-average number of shares of common stock outstanding throughout the year: The earnings per share (EPS) of common stock = earnings available for common stock divided by the weighted-average number of common shares outstanding: EPS = $7,300 ÷ 1,325 shares of common stock EPS = $ 5.51 per share of common stock..... EXAMPLE Calculate the WACC using market value weights and the component capital costs 'Weighted Average Cost Of Capital - WACC' A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing: Weighted Average Cost Of Capital (WACC) Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, using the formula: EXAMPLE Recalculate the WACC based on both book value and market value weights assuming that the before-tax cost of debt The Weighted Average Cost of Capital” and the section “Four Mistakes to Avoid” at the end of the chapter. The WACC formula discussed below does not include Preferred Stock. Should your company use PS, be sure to adjust the equation for it, and see the section in the chapter on the Cost of Preferred Stock. The WACC formula that we use is: WACC = wdrd(1-T) + wsrs We need to know how to calculate: 1. rs the cost of common equity. Use the Security Market Line (SML) – this is why you learn how to calculate a company’s beta and also why you learn how to find the appropriate risk-free rate and market-risk premium. For a review, see the section the text, The CAPM Approach. 2. The weights (wd and ws – note that: wd + ws = 1; so you only have to calculate one of them). We need to calculate the weight of debt and the weight of equity (for the cost of debt, this simply means: what proportion of the firm’s financing is by debt?). There is a lot to say here, simplified as Theory 1, Theory 2 and Practice: a. Theory 1: Theory says that we should use the target weights along with the market values of both debt and equity (see the Four Mistakes to Avoid). But the market value of debt is typically difficult to calculate, because we need to know the YTM (which is rd) for all of the company’s debt, but we cannot calculate the YTM without having the current prices of the company’s outstanding bonds, and most company’s bonds do not trade (i.e., they will not have up-to-date or current prices – remember how to calculate the price (value) of a bond on your calculators?!). As a result, at least for the group project, we go to Theory 2. b. Theory 2: Theory also says that we should use the TARGET weights, but this is a management decision, and as “outsiders” we do not have access to the thoughts of the CFO or CEO. So we should look instead to the historical pattern of the use of debt (mix of debt and equity), and this is one reason that you should have about 10 years of financial data. c. Practice: Since we cannot “work” according to the strict theory of finance, we have to estimate the relevant weights. As a result, we will use the formula: wd = Book Value of Debt / [Market Value of Equity + Book Value of Debt] The book value of debt is calculated by adding up ALL of the debt on the balance sheet. This will typically be the sum of Notes Payable, Current Portion of LT Debt and Long-Term Debt. The market value of equity is the “Market Cap,” and equals the number of (common) shares outstanding multiplied by the price/share. Note that the “timing” of this value should coincide with the book value of debt. For example, if you calculate the book value of debt as of 12/31/03, then the market cap should also be calculated for that date NPV = Present Value (PV) of the Cash Flows discounted at WACC.
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