The W.C. Pruett Corp. has $600,000 of interest-bearing debt outstanding,and it pays an annual interest rate of 7%. In addition, it has $600,000 of commonstock on its balance sheet. It finances with only debt and common equity, so it has no preferred stock. Its annual sales are $2.7 million, its average tax rate is 35%, and its profitmargin is 7%. What are its TIE ratio and its return on invested capital (ROIC)?
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.
The W.C. Pruett Corp. has $600,000 of interest-bearing debt outstanding,
and it pays an annual interest rate of 7%. In addition, it has $600,000 of common
stock on its
margin is 7%. What are its TIE ratio and its
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