Tram-Ropes Limited Balance Sheet 2022 Cash 1,000,000.00 Accounts Payable 8,000,000.00 Accounts Receivable 12,000,000.00 Notes Payable 8,500,000.00 Marketable Securities 3,000,000.00 Long Term Debt 20,000,000.00 Inventories 7,500,000.00 Common Stock 7,500,000.00 Fixed Assets 26,500,000.00 Preferred Stock 6,000,000.00 Total Assets 50,000,000.00 Total Liabilities & Equity 50,000,000.00 Additional Information: i. The Long-Term debt consists of 8% annual coupon bonds, with 15 years to maturity and are currently selling for 95% of par. ii. The company’s common shares which have a book value of $20 per share are currently selling at $25 per share. iii. Preferred shares have a book value of $100 per share. These shares are currently selling at $120 per share and pays dividends of 6% per annum on book value. iv. The dividend growth rate is expected to be 3%, and dividend for 2023 is projected to be $5.00 per share. v. The Company’s Tax rate is 30%. Determine the following for Tram-Ropes Limited: A. Total Market value of the firm’s capital structure. B. After-tax Cost of Debt. C. Cost of Common Stock. D. Cost of Preferred Stock. E. WACC.
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.
Reference is made to the 2022 Balance Sheet of Tram-Ropes limited.
Tram-Ropes Limited Balance Sheet 2022
Cash 1,000,000.00 Accounts Payable 8,000,000.00
Accounts Receivable 12,000,000.00 Notes Payable 8,500,000.00
Marketable Securities 3,000,000.00 Long Term Debt 20,000,000.00
Inventories 7,500,000.00 Common Stock 7,500,000.00
Fixed Assets 26,500,000.00 Preferred Stock 6,000,000.00
Total Assets 50,000,000.00 Total Liabilities & Equity 50,000,000.00
Additional Information:
i. The Long-Term debt consists of 8% annual coupon bonds, with 15 years to maturity and are currently selling for 95% of par.
ii. The company’s common shares which have a book value of $20 per share are currently selling at $25 per share.
iii.
iv. The
v. The Company’s Tax rate is 30%.
Determine the following for Tram-Ropes Limited:
A. Total Market value of the firm’s capital structure.
B. After-tax Cost of Debt.
C. Cost of Common Stock.
D. Cost of Preferred Stock.
E. WACC.
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