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Arkansas Corporation

Balance Sheet

December 31, 2020

Assets

Current Assets

Cash ................................................................ $ 140,000

Marketable Securities ......................................... 80,000

Accounts Receivable (net) .................................. 500,000

Inventory ............................................................. 300,000

Total Current Assets ...................................................... $1,020,000

Investments ............................................................................................ 200,000

Net Plant & Equipment ......................................................................... 800,000

Total Assets ........................................................................................... $2,020,000

Liabilities

Current Liabilities

Accounts Payable .............................................. $ 540,000

Long-Term Liabilities

Bonds Payable ................................................... 800,000

Total Liabilities ...................................................................................... $ 1,340,000

Stockholders Equity

Preferred Stock, $25 par value ......................... 150,000

Common Stock, $1 par value ........................... 50,000

Capital Paid in excess of par ........................... 200,000

Retained Earnings ............................................ 280,000

Total Stockholders Equity ............................................ 680,000

Total Liabilities & Stockholders Equity .............................................. $2,020,000

Arkansas Corporation

Income Statement

For the Year Ending December 31, 2020

Sales (all on credit) ................................................................................. $ 4,800,000

Less: Cost of Goods Sold ........................................................... 3,100,000

Gross Profit ............................................................................................ 1,700,000

Less: Selling & Administrative Expenses* ................................ 1,000,000

Operating Profit (EBIT) ......................................................................... 700,000

Less: Interest Expense ............................................................... 70,000

Earnings Before Taxes (EBT) ............................................................... 630,000

Less: Taxes ................................................................................ 157,500

Earnings After Taxes (EAT) ................................................................ $ 472,500

* Includes $85,000 in lease expenses

Industry Ratio Averages:

Profitability Ratios:

Profit Margin 9.80%

ROA 21.00%

ROE 40.00%

Asset Utilization Ratios:

A/R Turnover 9.50x

Avg. Collection Period 40 days

Inventory Turnover 14.00x

Fixed Asset Turnover 5.50x

Total Asset Turnover 2.25x

Liquidity Ratios:

Current Ratio 1.75x

Quick Ratio 1.25x

Debt Utilization Ratios:

Debt to Total Assets 52.00%

Times Interest Earned 14.50x

Fixed Charge Coverage 7.20x

# of Common Shares Outstanding ...................................... 50,000

P/E Ratio ............................................................................. 25.35

Preferred Dividend (existing shares) .................................. $2.00

Market Yield for Preferred Stock ...................................... 7.00%

Costs: Variable = $3,000,000

Fixed = $1,100,000

Expected Common Dividend ............................................. $ 3.00

Common stock value growth rate ...................................... 7.50%

Bond Market Yield ............................................................ 6.00%

Preferred Floatation cost .................................................... $ 1.50

Preferred stock new issue price ......................................... $ 50.00

Capital Budgeting Opportunity Information

Initial Investment amount $600,000

Expected Cash Flows

Year 1 $100,000

Year 2 200,000

Year 3 200,000

Year 4 200,000

Information for Leverage Ratios

Quantity of Units 10,000

Price per unit $ 480

* Calculate the following:

NPV of the Capital Budgeting Opportunity using WACC.

Payback period of the Capital Budgeting Opportunity.

Price of one share of Preferred stock (existing shares).

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