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You are evaluating the value of Maxima, Inc, a privately-owned company. Maximas income statement and balance sheet are provided below. In this company, all items
- You are evaluating the value of Maxima, Inc, a privately-owned company. Maximas income statement and balance sheet are provided below. In this company, all items on the income statement, all assets, and Accounts Payable will increase at the same percentage from 2021 to 2022.
Income Statement | 2021 | Assumptions: | ||||||
Revenues | 8,476 | COGS % | 60% | |||||
Cost of Goods Sold | 5,086 | Depreciation % | 10% | |||||
Depreciation | 848 | SGA % | 12% | |||||
SG&A Expense | 1,017 | Tax | 40% | |||||
Operating Income | 1,526 | NWC/Sales | 23% | |||||
Interest expense | 309 | Gross PPE/Sales | 120% | |||||
Earnings before taxes | 1,217 | Sales growth | 6% | |||||
Taxes (40%) | 487 | |||||||
Net Income | 730 | |||||||
Balance Sheet | ||||||||
Cash | 169 | Accounts Payable | 339 | |||||
Accounts Receivable | 848 | Long Term Debt | 5,066 | |||||
Inventory | 1,271 | Total Liabilities | 5,405 | |||||
Total Current Assets | 2,289 | Paid in Capital | 100 | |||||
Gross PPE | 10,171 | Retained Earnings | 5,260 | |||||
Accumulated Depr | 1,695 | Total Shareholders Equity | 5,360 | |||||
Net PPE | 8,476 | Total Liabilities and | ||||||
Total Assets | 10,765 | Shareholders Equity | 10,765 | |||||
Number of Shares | 1,000 |
You need to find an appropriate discount rate with which to discount Maximas future cash flows. What weighted average cost of capital should be used to evaluate Maxima? Assume Maxima will continue to obtain debt at its 2021 average interest rate (interest expense divided by interest-bearing debt) and its target capital structure is 50% debt and 50% equity. Assume that equity holders are looking for an 11% rate of return on their equity position.
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