Presented below is the balance sheet of ABC Company as of December 31, 2015: Assets Liabilities & Equity Cash Php30,400 Income Tax payable Php 4,800 Accounts receivable 48,000 Inventory 17,600 Ordinary Shares 256,000 PPE 232,000 Retained Earnings 67,200 Total Assets Php328,000 Total L&E Php 328,000 The manager instructs you to update the balances based on the budget below: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Sales Php112,000 Php128,000 Php144,000 Php140,800 Production Costs 76,800 80,000 89,600 80,000 Operating expenses 25,600 27,200 28,800 30,400 Annual depreciation (included in the amounts above): -Production costs: Php70,400 -Operating expenses: Php19,200 Inventory balances are expected to be: Mar 31: Php56,000; Jun 30: Php52,000; Sep 30: Php60,000 Dec 31: Php48,000 All production costs and operating expenses, except depreciation, are to be paid during the quarter incurred. Sales are made either through cash or credit. The Company expects quarterly sales to be made 20% in cash and 80% in credit. As to the credit sales, the same are collected 50% in the quarter of sales and 48% in the quarter after the sale. The rest are budgeted to be uncollectible and recognized as bad debts in the quarter incurred. There is no allowance for bad debts as of December 31, 2015. Dividends are paid at the end of June and December. The amount of dividends is 10% of the cash balance available at the end of the 1st quarter for June dividends and the 3rd quarter for December dividends. Income tax is equal to 30% of the quarter’s income and is paid in the following quarter.
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.
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Presented below is the balance sheet of ABC Company as of December 31, 2015:
Assets Liabilities & Equity
Cash Php30,400 Income Tax payable Php 4,800
Inventory 17,600 Ordinary Shares 256,000
PPE 232,000
Total Assets Php328,000 Total L&E Php 328,000
The manager instructs you to update the balances based on the budget below:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Sales Php112,000 Php128,000 Php144,000 Php140,800
Production Costs 76,800 80,000 89,600 80,000
Operating expenses 25,600 27,200 28,800 30,400
- Annual
depreciation (included in the amounts above):
-Production costs: Php70,400
-Operating expenses: Php19,200
- Inventory balances are expected to be:
Mar 31: Php56,000; Jun 30: Php52,000; Sep 30: Php60,000 Dec 31: Php48,000
- All production costs and operating expenses, except depreciation, are to be paid during the quarter incurred.
- Sales are made either through cash or credit. The Company expects quarterly sales to be made 20% in cash and 80% in credit. As to the credit sales, the same are collected 50% in the quarter of sales and 48% in the quarter after the sale. The rest are budgeted to be uncollectible and recognized as
bad debts in the quarter incurred. There is no allowance for bad debts as of December 31, 2015. - Dividends are paid at the end of June and December. The amount of dividends is 10% of the cash balance available at the end of the 1st quarter for June dividends and the 3rd quarter for December dividends.
- Income tax is equal to 30% of the quarter’s income and is paid in the following quarter.
Cash balance as of September 30, 2016:
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