Finance and Accounting - Research Paper Example

It is without doubt that table salt had developed into a well-rounded and mature enterprise but Sea Shore Salt had grown gradually over the years however, on the peril of its competitors that were not well known in the business. The company had developed a legacy with its brand name that was ideally known and recognized in the area giving the company a competitive advantage despite it being very difficult to pronounce the name quickly (Sages & Grable 57). Bernice reported to work on January 2, 2006 and everything was seen to be going smoothly until Mr.

Brinepool sent her a memo on the company’s cost of capital, giving her the task of explain to all the other managers the company’s weighted average cost of capital. Bernice had not expected such a task so soon and hence, she stayed at the office late that night to prepare for any questions that may be shot at her during the meeting that was scheduled to be held the following day. Bernice at first analyzed and summarized the company’s recent balance sheet to and later on wrote down some points she had discovered: (Sages & Grable 58).

The bank where the company had taken a loan charged an interest that was similar to the existing market rate bearing in mind that the long- term debt had previously been issued not so long ago. This meant that the book as well as the market values of the debt could not have a great difference in margin. The company had issued stock about 35 years ago at the time when the interest rates were significantly lower than they are now. The stock were expected to rise by a large margin over the years and eventually become very lucrative in future though this did not happen.

The current stock which was initially preferred was now trading at only $70 per share contrary to what the management expected the share price to stand at by this time. Common stock was expected to trade at $40 per share by this time. Earnings for the subsequent year were projected to be at about $4 and the dividends shareholders were going to receive at the end of the fiscal year was probably expected to be around $2 per share. Sea Shore Salt had a tradition of using 50% of her earnings to pay dividends to its shareholders and the rest would be retained by the company for future expansion and growth. Fig 12. 2 Mr.

Brinepool’s cost of capital memo Sea Shore Salt Company Spring Vacation Beach, Florida CONFIDENTIAL MEMORANDUM DATE: January 15, 2006 TO: S.S.S. Management FROM: Joe- Bob Brinepool, president SUBJECT: Cost of capital This memo gives and insight and understanding about the company’s long- term policy concerning rates to be considered in terms of making decisions involving capital investment. Recently, many people have started to raise questions and there has been an air of confusion with regards to this disturbing matter.

Sea Shore Salt analyses investment by discounted a cash flow that is discounted. The problem in discount rate is the weighted average cost of capital experienced by the company after tax. The weighted average cost of capital is the combination of the amount of returns that investor expect a company to generate at the end of each fiscal year. These investors include persons or institutions such as banks, bond holders or even stock investors; this is on top of the already present stock owners. Sea Salt financings are summarized in the following table Amount (in millions) percent of total rate of return Bank loan 120 20% 8% Bond issue 80 13.3