Reference no: EM132513496
Kho Bid Manufacturing Company wants to determine the impact of changing the financing mix when using an aggressive current asset strategy of having current assets at 30% of sales. Earnings before interest and taxes are expected to be P180,000. Short-term interest rates are 10% and long-term rates are 15%. The firm's tax rate is 34%.
The company wants to maintain a mix of 50% debt and 50% equity under restricted, compromise and flexible financing strategies as shown below:
KHO BID MANUFACTURING COMPANY
Pro-Forma Statement of Financial Position
As of December 31, 2020
ASSETS Restricted Compromise Flexible
Current Assets P300,00 P300,000 P300,000
Fixed Assets 600,000 600,000 600,000
TOTAL ASSETS P900,000 P900,000 P900,000
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities (10%) P100,000 P300,000 P450,000
Long-term Liabilities (15%) 350,000 150,000 -
Total Liabilities P450,000 P450,000 P450,000
Stockholders' equity 450,000 450,000 450,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY P900,000 P900,000 P900,000
Required:
Question 1: Show the expected return on equity, net working capital and current ratio for each proposed strategy.
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