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Last year Miami Rivet had $5 million in operating income (EBIT)
Last year Miami Rivet had $5 million in operating income (EBIT). Its depreciation expense was $1 million, its interest expense was $1 million, and its corporate tax rate was 25%. At year-end, it had $14 million in operating current assets, $3 million in accounts payable, $1 million in accruals, $2 million in notes payable, and $15 million in net plant and equipment. Assume Miami Rivet has no excess cash. Miami Rivet uses only debt and common equity to fund its operations. (In other words, Miami Rivet has no preferred stock on its balance sheet.) Miami Rivet had no other current liabilities. Assume that Miami Rivet only noncash item was depreciation. Based on this information answer the following questions: Question: If the firm's after-tax percentage cost of capital is 9%, what is the firm's Long-term debt at year-end?
Expert Solution
| Particular | Amount |
| ASSETS | |
| Net Plant & Equipment | $15,000,000 |
| Operating Current Assets | $14,000,000 |
| Accruals | $1,000,000 |
| Total Assets | $30,000,000 |
| Shareholder's Equity | $17,400,000 |
| Long Term Debt ( Balancing Figure) | $7,600,000 |
| Accounts Payable | $3,000,000 |
| Notes payable | $2,000,000 |
| Total Equity & Liabilities | $30,000,000 |
So, Firm' long Term Debt at the end of Year= $ 7,600,000.
Workings:
Computation of Miami Rivet's Total Stockholders' Equity:
Total Stockholders' Equity = Common Stock + Retained Earnings
Here,
Retained Earnings = Beginning Balance of Retained Earnings + Net Income-Cash Dividends Paid
= $11,200,000+ ($5,000,000-$1,000,000)*(1-25%) -$1,800,000
= $12,400,000
Total Stockholders' Equity = $5,000,000+$12,400,000 = $17,400,000
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