facturing Company decides to examine its working capital policy. In addition to its current strategy of maintaining current assets at 50 percent of sales, Five Star is considering two other strategies based on current assets at 30 or 70 percent of next year's sales. Projected net sales and fixed assets for next year are P1,000,000 and P600,000, respectively. Five Star plans to maintain its existing capital structure of 50 percent debt and 50 percent equity. Current liabilities are to be 40 percent of projected total liabilities. Required: c. Calculate Five Star's net working capital and current ratio under each of the three strategies. d. Explain what effect these strategies would have on five Star's liquidity
facturing Company decides to examine its working capital policy. In addition to its current strategy of maintaining current assets at 50 percent of sales, Five Star is considering two other strategies based on current assets at 30 or 70 percent of next year's sales. Projected net sales and fixed assets for next year are P1,000,000 and P600,000, respectively. Five Star plans to maintain its existing capital structure of 50 percent debt and 50 percent equity. Current liabilities are to be 40 percent of projected total liabilities. Required: c. Calculate Five Star's net working capital and current ratio under each of the three strategies. d. Explain what effect these strategies would have on five Star's liquidity
Chapter2: Financial Statements, Cash Flow, And Taxes
Section: Chapter Questions
Problem 15SP
Related questions
Question
Answer d-g
Transcribed Image Text:Addressing Working Capital Policies and Management.
Refer to (b) and the following information about Five Star Manufacturing
Company to solve for (e) and (f).
273
Five Star expects its earnings before interest and taxes in 20X5 to be 18 percent of
P1,000,000 in sales. Interest rates are projected to remain at 10 percent for short-
term debt and 15 percent for long-term debt. The firm's tax rate will be 34 percent.
Required:
e. What is Five Star's rate of return on equity for each of the three strategies?
f. Describe the relationship between Five Star's liquidity and profitability.
Use the following information about Five Star Manufacturing Company to solve
for (g).
Five Star wants to determine the impact of changing the financing mix when using
an aggressive current asset strategy of having current assets at 30 percent of sales.
Earnings before interest and taxes are expected to be P180,000. Short-term interest
rates are 10 percent and long-term rates are 15 percent. The firm's tax rate is 34
percent. Five Star wants to maintain a mix of 50 percent debt and 50 percent equity
under restricted, compromise and flexible financing strategies as shown below.
Five Star Manufacturing Company
Pro Forma Statement of Financial Position
As of December 31, 20X5
Financing Mix Strategies
Restricted
Compromise
Flexible
P300,000
P300,000
Current assets
P300,000
600,000
600,000
600,000
Fixed assets
P900.000
P900.000
P900.000
Total assets
P300,000
P450,000
P100,000
150,000
Current liabilities (10%)
Long-term liabilities (15%)
350,000
0
P450,000
P450,000
P450,000
Total liabilities
Stockholders' equity
450,000
450,000
450,000
Total liabilities and
P900.000
P900.000
P900,000
Owners' equity
Required:
g. Show the expected return on equity, net working capital and current ratio
for each proposed strategy.
Transcribed Image Text:Problem 5 (Working Capital)
The questions (a) through (g) refer to Five Star Manufacturing Company. Use the
following information to solve for (a) and (b).
Five Star Manufacturing Company
Statement of Financial Position
As of December 31, 20X4
Cash
P 200,000
300,000
P 20,000 Current Liabilities (10%)
30,000 Long-term liabilities (15%)
150,000 Total liabilities
Marketable securities
Accounts receivable
Inventory
P 500,000
200,000
P 400,000
P 500,000
Total current assets
Net fixed assets
Stockholders' equity
Total Liabilities and
600,000
P1.000.000 Owners' equity
P1,000,000
Total assets
During 20X4, the firm's earnings before interest and taxes were 20 percent of
P800,000 in sales. The income tax rate is 34 percent.
Required:
Determine the level of working capital, net working capital and current
ratio.
b. Calculate the return on equity (net income/stockholders' equity).
Use the following information about Five Star Manufacturing Company to solve
for (c) and (d).
Five Star Manufacturing Company decides to examine its working capital policy.
In addition to its current strategy of maintaining current assets at 50 percent of
sales, Five Star is considering two other strategies based on current assets at 30 or
70 percent of next year's sales. Projected net sales and fixed assets for next year
are P1,000,000 and P600,000, respectively. Five Star plans to maintain its existing
capital structure of 50 percent debt and 50 percent equity. Current liabilities are to
be 40 percent of projected total liabilities.
Required:
c. Calculate Five Star's net working capital and current ratio under each of
the three strategies.
d.
Explain what effect these strategies would have on five Star's liquidity.
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