TEW COMPANY Balance Sheet As of December 31 ASSETS Cash $ 20,000 Accounts receivable 80,000 Inventory 50,000 Net plant and equipment 250,000 Total assets $ 400,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts payable $ 40,000 Accrued expenses 60,000 Long-term debt 130,000 Common stock 100,000 Paid-in capital 10,000 Retained earnings 60,000 Total liabilities and stockholders’ equity $ 400,000 TEW COMPANY Income Statement For the year ended December 31 Sales (all on credit) $ 500,000 Cost of goods sold 200,000 Gross profit $ 300,000 Sales and administrative expenses 20,000 Fixed lease expenses 10,000 Depreciation 40,000 Operating profit $ 230,000 Interest expense 20,000 Profit before taxes $ 210,000 Taxes (35%) 73,500 Net income $ 136,500 Refer to the tables above. The firm's average collection period is (assume a 360-day calendar).
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.
| TEW COMPANY | ||
| As of December 31 | ||
| ASSETS | ||
| Cash | $ | 20,000 |
| Accounts receivable | 80,000 | |
| Inventory | 50,000 | |
| Net plant and equipment | 250,000 | |
| Total assets | $ | 400,000 |
| LIABILITIES AND |
||
| Accounts payable | $ | 40,000 |
| Accrued expenses | 60,000 | |
| Long-term debt | 130,000 | |
| Common stock | 100,000 | |
| Paid-in capital | 10,000 | |
| 60,000 | ||
| Total liabilities and stockholders’ equity | $ | 400,000 |
| TEW COMPANY | ||
| Income Statement | ||
| For the year ended December 31 | ||
| Sales (all on credit) | $ | 500,000 |
| Cost of goods sold | 200,000 | |
| Gross profit | $ | 300,000 |
| Sales and administrative expenses | 20,000 | |
| Fixed lease expenses | 10,000 | |
| 40,000 | ||
| Operating profit | $ | 230,000 |
| Interest expense | 20,000 | |
| Profit before taxes | $ | 210,000 |
| Taxes (35%) | 73,500 | |
| Net income | $ | 136,500 |
Refer to the tables above. The firm's average collection period is (assume a 360-day calendar).
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