The simplified balance sheet for the Dutch manufacturer Rensselaer Felt (figures in € thousands) is as follows: Cash and marketable securities € 2,700 Short-term debt € 76,800 Accounts receivable 121,200 Accounts payable 63,200 Inventory 126,200 Current liabilities € 140,000 Current assets € 250,100 Property, plant, and equipment 213,200 Long-term debt 209,800 Deferred taxes 46,200 Other assets 87,800 Shareholders' equity 247,500 Total € 597,300 Total € 597,300 The debt has an interest rate of 6.50% (short term) and 8.50% (long term). The expected rate of return on the company's shares is 15.50%. There are 7.58 million shares outstanding, and the shares are trading at €44. The tax rate is 25%. Assume the company issues €50 million in new equity and uses the proceeds to retire long-term debt. Also assume the company's borrowing rates are unchanged and the short-term debt is permanent. Use the three-step procedure. a. Calculate the cost of equity after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Calculate the WACC after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
The simplified
| Cash and marketable securities | € | 2,700 | Short-term debt | € | 76,800 | ||
| Accounts receivable | 121,200 | Accounts payable | 63,200 | ||||
| Inventory | 126,200 | Current liabilities | € | 140,000 | |||
| Current assets | € | 250,100 | |||||
| Property, plant, and equipment | 213,200 | Long-term debt | 209,800 | ||||
| 46,200 | |||||||
| Other assets | 87,800 | Shareholders' equity | 247,500 | ||||
| Total | € | 597,300 | Total | € | 597,300 | ||
The debt has an interest rate of 6.50% (short term) and 8.50% (long term). The expected
a. Calculate the
b. Calculate the WACC after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
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