Income Statement Balance Sheet
Year-Ended 12/31/04 12/31/04 12/31/03
Sales $1,500,000 Current Assets $50,000 $ 35,000
Cost of Good Sold 700,000 Gross Fixed Assets 1,100,000 750,000
Operating Expenses 400,000 Net Fixed Assets 450,000 300,000
Depreciation 200,000 Total Assets 500,000 335,000
Operating Income 200,000 Current Liabilities $ 25,000 $ 30,000
Interest Expense 50,000 Long-term debt 340,000 230,000
Taxable Income 150,000 Common Stock 5,000 5,000
Taxes 45,000 Retained Earnings 130,000 70,000
Net Income $ 105,000 Total Liab. & Equity 500,000 335,000
7. Given these financial statements, what is the company
Income Statement Balance Sheet
Year-Ended 12/31/04 12/31/04 12/31/03
Sales $1,500,000 Current Assets $50,000 $ 35,000
Cost of Good Sold 700,000 Gross Fixed Assets 1,100,000 750,000
Operating Expenses 400,000 Net Fixed Assets 450,000 300,000
Depreciation 200,000 Total Assets 500,000 335,000
Operating Income 200,000 Current Liabilities $ 25,000 $ 30,000
Interest Expense 50,000 Long-term debt 340,000 230,000
Taxable Income 150,000 Common Stock 5,000 5,000
Taxes 45,000 Retained Earnings 130,000 70,000
Net Income $ 105,000 Total Liab. & Equity 500,000 335,000
7. Given these financial statements, what is the company
Related questions
Star Industries Inc comparative financial statements for the years ending December 31, 2010 and 2009, are as follows. The market price for Star Industries common stock was $ 20 on December 31, 2009, and $ 32 on December 31, 2010. Common stock shares outstanding for both 2010 and 2009 are 70000 shares (Ie $ 700,000 / $ 10 par)
Star Industries
Comparative Income Statement
For the Years Ended December 31, 2010 and 2009
| 2010 | 2009 | ||
| Sales | $7,000,000 | $5,670,000 | |
| Sales returns and allowances | $325,000 | $175,000 | |
| Net Sales | $6,675,000 | $5,495,000 | |
| Cost of Goods Sold | $4,850,000 | $3,950,000 | |
| Gross Profit | $1,825,000 | $1,545,000 | |
| Selling Expenses | $780,000 | $464,000 | |
| Administrative Expenses | $485,000 | $423,000 | |
| Total Operating Expenses | $1,465,000 | $887,000 | |
| Income From Operations | $360,000 | $658,000 | |
| Other Income | $25,000 | $19,200 | |
| Earnings before Interest & taxes (EBIT) | $385,000 | $677,200 | |
| Other Expenses (interest) | $105,000 | $64,000 | |
| Income Before Income Tax | $280,000 | $613,200 | |
| Income Tax Expense | $35,000 | $176,000 | |
| Net Income | $245,000 | $437,200 |
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Star Industries
Comparative Retained Earnings Statement
For the Years Ended December 31, 2010 and 2009
| 2010 | 2009 | ||
| Retained Earnings, Januray 1 | $ 723,000 | $ 355,800 | |
| Add Net Income for year | $245,000 | $437,200 | |
| Total | $ 968,000 | $ 793,000 | |
| Deduct dividends: | |||
| Preferred Stock | $ 40,000 | $ 40,000 | |
| Common Stock | $ 45,000 | $ 30,000 | |
| Total | $ 85,000 | $ 70,000 | |
| Retained Earnings, December 31 | $883,000 | $ 723,000 |
Star Industries
Comparative Balance Statement
December 31, 2010 and 2009
| 12-31-2010 | 12-31-2009 | ||||
| Assets | |||||
| Current Assets | |||||
| Cash | $235,000 | $215,000 | |||
| Temporary Investments | $10,000 | $50,000 | |||
| Accounts Receivable (Net) | $525,000 | $425,000 | |||
| Inventories | $940,000 | $580,000 | |||
| Prepaid Expenses | $30,000 | $20,000 | |||
| Total Current Assets | $1,740,000 | $1,290,000 | |||
| Long-Term Investments | $165,000 | $135,000 | |||
| Property, Plant and Equipment (Net) | $2,525,000 | $1,878,000 | |||
| Total Assets | $4,430,000 | $3,303,000 | |||
| Liabilities | |||||
| Current Liabilities | $950,000 | $780,000 | |||
| Long-Term Liabilities | |||||
| Mortgage Note Payable 8% (due 2013) | $410,000 | $0 | |||
| Bonds Payable, 7% (due 2016) | $1,200,000 | $800,000 | |||
| Total Long Term Liabilities | $1,610,000 | $800,000 | |||
| Total Liabilities | $2,560,000 | $1,580,000 | |||
| Stockholders' Equity | |||||
| Preferred 8% stock, $ 100 Par | $300,000 | $300,000 | |||
| Common Stock, $ 10 Par | $700,000 | $700,000 | |||
| Retained Earnings | $883,000 | $723,000 | |||
| Total Stockholders' Equity | $1,883,000 | $1,723,000 | |||
| Total Liabilities and Stockholders' Equity | $4,443,000 | $3,303,000 | |||
Determine the following measures for 2010: Compare with industry norms and comment:
| Ratios | Industry Norm | ||||
| 1. Working Capital | N/A | ||||
| 2. Current Ratio | 2.2 | ||||
| 3. Quick Ratio | 0.8 | ||||
| 4. Accounts Receivable Turnover | 16.0 | ||||
| 5. Number of days sales in receivables | 22.2 | ||||
| 6. Inventory Turnover | 5.0 | ||||
| 7. Number of days sales in inventory | 75.0 | ||||
| 8. Ratio of fixed assets to long-term liabilites | 2.0 | ||||
| 9. Ratio of liabilities to stockkholders equity | 0.7 | ||||
| 10. Number of times interest charges are earned | 8.5 | ||||
| 11. Number of times preferred dividends earned | 7.1 | ||||
| 12. Ratio of net sales to assets | 2.1 | ||||
| 13. Rate earned on total assets | 8.5% | ||||
| 14. Rate earned on stockholders' equity | 12.0% | ||||
| 15. Rate earned on common stockholders' equity | 14.2% | ||||
| 16. Earnings per share on common stock | $3.65 | ||||
| 17. Price-earnings ratio | 9.2 | ||||
| 18. Dividends per share | $0.80 | ||||
| 19. Dividend yield | 2.50% | ||||
Thanks!
MINI CASE: CASTILLO PRODUCTS COMPANY
The Castillo Products Company was started in 2011. The company manufactures components for personal decision assistant (PDA) products and for other handheld electronic products. A difficult operating year, 2012, was followed by a profitable 2013. The founders (Cindy and Rob Castillo) are interested in estimating their cost of financial capital since they are expecting to secure additional external financing to support planned growth.
Short-term bank loans are available at an 8 percent interest rate. Cindy and Rob believe that the cost of obtaining long-term debt and equity capital will be somewhat higher. The real interest rate is estimated to be 2 percent and a long-run inflation premium is estimated at 3 percent. The interest rate on long-term government bonds is 7 percent. A default-risk premium on long-term debt is estimated at 6 percent; plus Castillo Products is expecting to have to pay a liquidity premium of 3 percent due to the illiquidity associated with its long-term debt. The market risk premium on large-firm common stocks over the rate on long-term government bonds is estimated to be 6 percent. Cindy and Rob expect that equity investors in their venture will require an additional investment risk premium estimated at two times the market risk premium on large-firm common stocks.
Following are income statements and balance sheets for the Castillo Products Company for 2012 and 2013.
Castillo Products Company
| 2012 | 2013 | |
| Net sales | $900,000 | $1,500,000 |
| Cost of goods sold | 540,000 | 900,000 |
| Gross profit | 360,000 | 600,000 |
| Marketing | 90,000 | 150,000 |
| General and administrative | 250,000 | 250,000 |
| Depreciation | 40,000 | 40,000 |
| EBIT | -20,000 | 160,000 |
| Interest | 45,000 | 60,000 |
| Earnings before taxes | -65,000 | 100,000 |
| Income taxes | 0 | 25,000 |
| Net income (loss) | -$ 65,000 | $ 75,000 |
| 2012 | 2013 | |
| Cash | $ 50,000 | $ 20,000 |
| Accounts receivable | 200,000 | 280,000 |
| Inventories | 400,000 | 500,000 |
| Total current assets | 650,000 | 800,000 |
| Gross fixed assets | 450,000 | 540,000 |
| Accumulated depreciation | -100,000 | -140,000 |
| Net fixed assets | 350,000 | 400,000 |
| Total assets | $1,000,000 | $1,200,000 |
| Accounts payable | $ 130,000 | $ 160,000 |
| Accruals | 50,000 | 70,000 |
| Bank loan | 90,000 | 100,000 |
| Total current liabilities | 270,000 | 330,000 |
| Long-term debt | 300,000 | 400,000 |
| Common stock (.05 par) | 150,000 | 150,000 |
| Additional paid-in-capital | 200,000 | 200,000 |
| Retained earnings | 80,000 | 120,000 |
| Total liabilities and equity | $1,000,000 | $1,200,000 |
E.Cindy and Rob estimate that the market value of the common equity in the venture is $900,000 at the end of 2013. The market values of interest-bearing debt are judged to be the same as the recorded book values at the end of 2013. Estimate the market value-based weighted average cost of capital for Castillo Products.
F.Would you recommend to Cindy and Rob that they use the book value-based WACC estimate or the market value-based WACC estimate for planning purposes? Why?
