Handout # 6 FINANCE 5813 Spring 2017 Capital , Inc. , had the following Income Statement for 2016 : Income Statement REVENUES* $ 100, 000 EXPENSES Cost of Goods Sold 6 2,000 Gen & Adm 22 , 500 Depreciation 4, 000 $8, 500 EBIT 11, 500 Interest EXPENSE* 2. 240 Taxable Income* 9, 260 Income Tax ( 409/6) 3. 704 Net Income $ 5, 556 The Balance Sheet as of December 31 , 2016 , was as follows :! Balance Sheet _ ash I - 0- AIF 7, 500 AIR 17, 000 Notes Payable (69/6) 8. 400 Inventory 6 2.000 Total OL 16,000 Total CA 79,000 L - T Debt ( 819/6) 19 , 6:00 Net Plant & Equip . 50,000 Common Stock ( $1 par ) 1 , 000 Retained Earnings 92.400 Total Assets $129, 000 Total Liab .*& Equity $ 129, 000 The owner of Capital has asked if you would be interested in buying the firm . While the firm actually has some cash balances as of the end of 2016 , they have been removed from the 2016 financials to reflect the fact that the cash is a non -operating asset and the owner intends to take it out as a distribution upon sale . Being familiar with the industry , you expect sales to increase at a 5% rate indefinitely . However , you feel that you can accomplish several improvements . First , you feel that cost of goods sold can be trimmed to 5.5%/ of sales this year ( 2017 ) and finally to 509/0 next year ( 2018 ) . You also expect to trim the fat in GEA expense to 20% of sales this year , a level which you can maintain . Also , you feel that tighter control of credit policy can cut the average* collection period to 45 days . The inventory turnover rate ( based on COGS ; of 1. 0 currently can be* increased to 1 . 25 in 2017 and 1. 5 times in future years . The level of cash and plant & equipment ( as a percentage of sales ) and debt ( as a percentage of total assets ) all seem appropriate . If YOU require a 15% rate of return , what is the value you would place on the equity of Capital , Inc . ?"