Answer g Problem 5 (Working Capital)The questions (a) through (g) refer to Five Star Manufacturing Company. Use the following information tosolve for (a) and (b).Five Star Manufacturing CompanyStatement of Financial PositionAs of December 31, 20X4P 20,000 Current Liabilities (10%)30,000 Long-term liabilities (15%)150,000 Total liabilities200.000P 400,000 Stockholders' equity600.000 Total Liabilities & Owners' equityP1.000.000CashMarketable securitiesP 200,000300.000P 500,000Accounts receivableInventoryTotal current assetsP 500,000Net fixed assetsTotal assetsP1.000.000During 20X4, the firm's earnings before interest and taxes were 20 percent of P800,000 in sales. Theincome tax rate is 34 percent.Required:a. Determine the level of working capital, net working capital and current ratio.b. Calculate the return on equity (net income/stockholders').Use the following information ebout Five Ster Manufacturing Company to solve for (c) and (d).Five Star Manufacturing Company decides to examine its working capital policy. In addition to its currentstrategy of maintaining current assets at 50 percent of sales, Five Star is considering two other strategiesbased on current assets at 30 or 70 percent of next year's sales. Projected net sales and fixed assets fornext year are P1,000,000 and P600,000, respectively. Five Star plans to maintain its existing capitalstructure of 50 percent debt and 50 percent equity. Current liabilities are to be 40 percent of projected totalliabilities.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. Refer to (b) and the following information about Five Star Manufacturing Company to solve for (e) and (f).Five Star expects its eamings 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 currentasset strategy of having current assets at 30 percent of sales. Earnings before interest and taxes areexpected to be P180,000. Short-term interest rates are 10 percent and long-term rates are 15 percent. Thefirm's tax rate is 34 percent. Five Star wants to maintain a mix of 50 percent debt and 50 percent equityunder restricted, compromise and flexible financing strategies as shown below.Five Star Manufacturing CompanyStatement of Financial PositionAs of December 31, 20X5Financing Mix StrategiesCompromiseP 300,000600,000P 900.000RestrictedFlexibleCurrent assetsFixed assetsTotal assetsP 300,000600,000P 900.000P 300,000600.000P 900.000P 100,000350.000450,000450,000P 900.000P 300,000150,000450,000450,000P900.000P 450,000Current liabilities (10%)Long-term liabilities (15%)Total liabilitiesStockholders' equityTotal liabilities and Owners' equity450,000450.000P 900.000Required:g. Show the expected return on equity, net working capital and current ratio for each proposed strategy.

Question

Accepted Answer

•Return on equity (ROE): 
=Net incomes/shareholders equity 
•Net working capital:
= Current assets -…