Nishat Company Ltd. wants to calculate EPS and Retained Earnings for the year ended 2012 with a net profit before taxes of Rs. 350,000. The company is subject to a 35% tax rate and must pay Rs. 45,000 in preferred stock dividends before distributing any earnings on the 75,000 shares of common stock currently outstanding. Calculate earnings per share (EPS). If the firm paid common stock dividends of 0.85 per share, how many Rupees would go to retained earnings?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Q: 1 Nishat Company Ltd. wants to calculate EPS and
- Calculate earnings per share (EPS).
- If the firm paid common stock dividends of 0.85 per share, how many Rupees would go to retained earnings?
Q: 2 Red Storms Enterprises had sales of $60,000 in March and $70,000 in April.
The firm makes 30% of sales for cash, 50% are collected in the next month, and the remaining 20% are collected in the second month following sale.
A cash purchase of equipment costing $7,000 is scheduled in July.
The firm receives other income of $2,000 per month.
The firm’s actual or expected purchases, all made for cash, are $60,000,
$70,000, and $80,000 for the months of May through July, respectively.
Rent is $4,000 per month. Wages and salaries are 10% of the previous month’s sales. Cash dividends of $3,000 will be paid in June. Payment of principal and interest of $4,000 is due in June. Taxes of $5,000 are due in June.
Q: 3 Coping up with Uncertainties: Global Inc., forecasted sales of $80,000 during each of the next 3 months. It will make monthly purchases of $60,000 during this time. Wages and salaries are $8,000 per month plus 6% of sales. They are expecting to make a tax payment of $20,000 in the next month and a $15,000 purchase of fixed assets in the second month and to receive $8,000 in cash from the sale of an asset in the third month. All sales and purchases are for cash. Beginning cash and the minimum cash balance are assumed to be zero.
Requirement: Construct a cash budget for the next 3 months. Global Inc. is unsure of the sales levels, but all other figures are certain. If the most pessimistic sales figure is $80,000 per month and the most optimistic is $120,000 per month, what are the monthly minimum and maximum ending cash balances that the firm can expect for each of the 1-month periods?
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Retained earnings is the amount of profit retained by the entity after paying off the dividends. It is the amount that an entity keeps after paying dividends.
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