Finance Question

| March 14, 2016

9-14

WACC-Book weights and market weights Webster Company has compiled the information shown in the following table.

Source of capital Book Value Market Value After-Tax cost

Long-term debt $4,000,000 $3,840,000 6.0%

Preferred Stock 40,000 60,000 13.0

Common stock equity 1,060,000 3,000,000 17.0

Totals $5,100,000 $6,900,000

a. Calculate the weighted average cost of capital using book value weights.

b. Calculate the weighted average cost of capital using market value weights.

c. Compare the answers obtained in parts a and b. Explained the differences.

4-6

Finding Operating and free Cash Flows: Consider the balance sheets and selected data from the income statement of Keith Corporation that appear below.

Keith Corporation Balance Sheets

December 31

Assets 2012 2011

Cash $1,500 $1,000

Marketable securities 1,800 1,200

Accounts receivable 2,000 1,800

Inventories 2,900 2,800

Total current assets $8,200 $6,800

Gross Fixed Assets $29,500 $28,100

Less: Accumulated depreciation 14,700 13,100

Net fixed assets $14,800 $15,100

Total Assets $23,000 $21,800

Liabilities and Stockholder’s Equity

Accounts Payable $1,600 $1,500

Notes Payable 2,800 2,200

Accruals 200 300

Total Current Liabilities $4,600 $4,000

Long-term debt 5,000 5,000

Total liabilities $9,600 $9,000

Common stock $10,000 $10,000

Retained Earnings 3,400 2,800

Total stockholder’s equity $13,400 $12,800

Total liabilities and stockholder equity $23,000 $21,800

Keith Corporation Income State Data 2012

Depreciation $1,600

Earnings before interest and taxes (EBIT) 2,700

Interest Expense 367

Net profits after taxes 1,400

Tax rate 40%

a. Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended December 31, 2012.

b. Calculate the firm’s operating cash flow (OCF) for the year ended December 31, 2012.

c. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2012.

d. Interpret, compare, and contrast your cash flow estimates in parts b a

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