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The Castillo Products Company was started in 2011 The company manufactures components for personal decision assistant PDA products and for other handheld electronic products A difficult operating

The Castillo Products Company was started in 2011. The company manufactures components for personal decision assistant (PDA) products and for other handheld electronic products. A difficult operating year, 2012, was followed by a profitable 2013. The founders (Cindy and Rob Castillo) are interested in estimating their cost of financial capital since 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 large-firm 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 2012 and 2013.

Castillo Products Company

 

2012

2013

Net sales

$900,000

$1,500,000

Cost of goods sold

540,000

900,000

Gross profit

360,000

600,000

Marketing

90,000

150,000

General and administrative

250,000

250,000

Depreciation

40,000

40,000

EBIT

-20,000

160,000

Interest

45,000

60,000

Earnings before taxes

-65,000

100,000

Income taxes

0

25,000

Net income (loss)

-$ 65,000

$ 75,000

 

2012

2013

Cash

$ 50,000

$ 20,000

Accounts receivable

200,000

280,000

Inventories

400,000

500,000

Total current assets

650,000

800,000

Gross fixed assets

450,000

540,000

Accumulated depreciation

-100,000

-140,000

Net fixed assets

350,000

400,000

Total assets

$1,000,000

$1,200,000

Accounts payable

$ 130,000

$ 160,000

Accruals

50,000

70,000

Bank loan

90,000

100,000

Total current liabilities

270,000

330,000

Long-term debt

300,000

400,000

Common stock (.05 par)

150,000

150,000

Additional paid-in-capital

200,000

200,000

Retained earnings

80,000

120,000

Total liabilities and equity

$1,000,000

$1,200,000

  

--.Estimate the cost of short-term bank loans, long-term debt, and common equity capital for the Castillo Products Corporation.

 

Apr 30 2020 View more View Less

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