Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of Rupees): 2015 Current Assets Rs 2,000 Net fixed Assets 3,000 Total Assets Rs 5,000 Current Liabilities Rs 900 Long term Debt 1,200 Preferred stock 250 Common stock 1,300 Retained earnings 1,350 Total company equity Rs 2,650 Total liabilities & equity Rs 5,000 Skye’s earnings per share last year were Rs 3.20, the common stock sells for Rs 55.00, last year dividend was Rs 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at a rate of 9% per year. Skype’s preferred stock pays a dividend of Rs 3.30 per share, and new preferred stock could be sold at a price to net the company Rs 30.00 per share. The firm can issue long term debt at an interest rate (or before tax cost) of 10% and its marginal tax rate is 35%. The market risk premium is 5%, the risk free rate is 6%, and Skye’s beta is 1.516. In its cost of capital calculations, the company considers only long term capital; hence, it disregards current liabilities. Calculate the cost of each capital component, that is, the after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock
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.
Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of Rupees):
2015
Current Assets Rs 2,000
Net fixed Assets 3,000
Total Assets Rs 5,000
Current Liabilities Rs 900
Long term Debt 1,200
Preferred stock 250
Common stock 1,300
Total company equity Rs 2,650
Total liabilities & equity Rs 5,000
Skye’s earnings per share last year were Rs 3.20, the common stock sells for Rs 55.00, last year dividend was Rs 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at a rate of 9% per year. Skype’s preferred stock pays a dividend of Rs 3.30 per share, and new preferred stock could be sold at a price to net the company Rs 30.00 per share. The firm can issue long term debt at an interest rate (or before tax cost) of 10% and its marginal tax rate is 35%. The market risk premium is 5%, the risk free rate is 6%, and Skye’s beta is 1.516. In its cost of capital calculations, the company considers only long term capital; hence, it disregards current liabilities.
Calculate the cost of each capital component, that is, the after tax cost of debt, the cost of preferred stock, the
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