CASTILLO PRODUCTS COMPANY \begin{tabular}{|c|c|c|} \hline INCOME STATEMENT & 2018 & 2019 \\ \hline Net sales & S 900,000 & $1,500,000 \\ \hline Cost of goods sold & 540,000 & 900,000 \\ \hline Gross profit & 360,000 & 600,000 \\ \hline Marketing & 90,000 & 150,000 \\ \hline General and administrative & 250,000 & 250,000 \\ \hline Depreciation & 40,000 & 40,000 \\ \hline EBIT & 20,000 & 160,000 \\ \hline Interest & 45,000 & 60,000 \\ \hline Earnings before taxes & 65,000 & 100,000 \\ \hline Income taxes & 0 & 25,000 \\ \hline Net income (loss) & S65,000 & $75,000 \\ \hline BALANCE SHEET & 2018 & 2019 \\ \hline Cash & S 50,000 & $20,000 \\ \hline Accounts receivable & 200,000 & 280,000 \\ \hline Inventories & 400,000 & 500,000 \\ \hline Total current assets & 650,000 & 800,000 \\ \hline Gross fixed assets & 450,000 & 540,000 \\ \hline Accumulated depreciation & 100,000 & 140,000 \\ \hline Net fixed assets & 350,000 & 400,000 \\ \hline Total assets & $1,000,000 & $1,200,000 \\ \hline Accounts payable & $130,000 & S160,000 \\ \hline Accruals & 50,000 & 70,000 \\ \hline Bank loan & 90,000 & 100,000 \\ \hline Total current liabilities & 270,000 & 330,000 \\ \hline Long-term debt & 300,000 & 400,000 \\ \hline Common stock ( $0.05 par value) & 150,000 & 150,000 \\ \hline Additional paid-in-capital & 200,000 & 200,000 \\ \hline Retained earnings & 80,000 & 120,000 \\ \hline Total liabilities and equity & $1,000,000 & $1,200,000 \\ \hline \end{tabular} Castillo Products Company The Castillo Products Company was started in 2017. The company manufactures components for personal digital assistant (PDA) products and for other handheld electronic products. A difficult operating year, 2018, was followed by a profitable 2019. The founders (Cindy and Rob Castillo) are interested in estimating their cost of financial capital because 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 largefirm 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 2018 and 2019. C. Although, Castillo Products paid a low effective tax rate in 2019 , a 30 percent income tax rate is considered more appropriate when looking to the future. Estimate the after-tax cost of short-term bank loans, long-term debt, and the venture's common equity
