Amtek Company currently has total assets of Rs 3.2 million, of which current assets comprise Rs 0.2 million. Sales are Rs 10 million annually, and the before-tax net profit margin (the firm currently has no interest-bearing debt) is 12 percent. Given renewed fears of potential cash insolvency, an overly strict credit policy, and imminent stock outs, the company is considering higher levels of current assets as a buffer against adversity. Specifically, levels of Rs 0.5 million and Rs 0.8 million are being considered instead of the Rs 0.2 million presently held. Any addition to currents assets would be financed with new equity capital. Determine the total asset turnover, before-tax return on investment, and before-tax net profit margin under the three alternative levels of current assets. If the new additions to current assets were finance with long-term debt at 15 percent interest, what would be the before-tax interest “cost” of the two new policies?
Amtek Company currently has total assets of Rs 3.2 million, of which current assets comprise Rs 0.2 million. Sales are Rs 10 million annually, and the before-tax net profit margin (the firm currently has no interest-bearing debt) is 12 percent. Given renewed fears of potential cash insolvency, an overly strict credit policy, and imminent stock outs, the company is considering higher levels of current assets as a buffer against adversity. Specifically, levels of Rs 0.5 million and Rs 0.8 million are being considered instead of the Rs 0.2 million presently held. Any addition to currents assets would be financed with new equity capital. Determine the total asset turnover, before-tax return on investment, and before-tax net profit margin under the three alternative levels of current assets. If the new additions to current assets were finance with long-term debt at 15 percent interest, what would be the before-tax interest “cost” of the two new policies?
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 7P
Related questions
Question
Amtek Company currently has total assets of Rs 3.2 million, of which current assets comprise Rs 0.2 million. Sales are Rs 10 million annually, and the before-tax net profit margin (the firm currently has no interest-bearing debt) is 12 percent. Given renewed fears of potential cash insolvency, an overly strict credit policy, and imminent stock outs, the company is considering higher levels of current assets as a buffer against adversity. Specifically, levels of Rs 0.5 million and Rs 0.8 million are being considered instead of the Rs 0.2 million presently held. Any addition to currents assets would be financed with new equity capital.
- Determine the total asset turnover, before-tax return on investment, and before-tax net profit margin under the three alternative levels of current assets.
- If the new additions to current assets were finance with long-term debt at 15 percent interest, what would be the before-tax interest “cost” of the two new policies?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning