If a firm has the following sources of finance, Current liabilities $ 90,000 Long-term debt 380,000 Preferred stock 75,000 Common stock 240,000 earns a profit of $50,000 after taxes, and pays $8,000 in preferred stock dividends, what is the return on assets, the return on total equity, and the return on common equity? Round your answers to two decimal places. Return on assets: % Return on total equity: % Return on common equity: %
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
If a firm has the following sources of finance,
| Current liabilities | $ | 90,000 |
| Long-term debt | 380,000 | |
| Preferred stock | 75,000 | |
| Common stock | 240,000 |
earns a profit of $50,000 after taxes, and pays $8,000 in preferred stock dividends, what is the
Return on assets: %
Return on total equity: %
Return on common equity: %
Step by step
Solved in 3 steps with 5 images
