ABC Company Ltd i s working in food and beverages industry and is producer of Fruit Juices The management of company is thinking to expand its business by adding a new product line Rabri Milk during this summer The company is expecting that by introducing this new drink the company will be able to increase its sales from Rs 70, 00,000 to Rs 91, 00, 000 which is 30 growth in sales Furthermore the firm believes that its assets and liabilities will grow directly with its level of sales Its profit margin on sales would be 17 , an d its dividend payout ratio is 58 The accounting Department of company has also formulated Pro forma financial statements to analyze this investment decision against different evaluation criteria The balance sheet information is provided below both for current status and estimated figures after producing new product Balance Sheet Current Rs (000) Pro Forma Rs (000) Cash 1100 1200 Accounts Receivable 900 950 Inventories 100 400 Total Current assets 2100 2550 Fixed Assets 2200 2500 Total Assets 4300 5050 Accounts Payable 500 550 Short term Loans 300 700 Current Liabilities 800 1250 Long term Debt 1300 1600 Shareholders Equity 2200 2200 Total Liabilities and Shareholder's Equity 4300 5050 This pro forma balance sheet needs certain adjustments with change in revenue Therefore f rom all of the information provided above what do you think should the firm be able to finance growth in sales with retained earnings or forecast increases in debt i e (EFN ) You are also required to explain that which gears are usually addressed by management under investment decision As the company has financed its total assess with 50 debt Therefore t he company needs to pay its loan amount in equal repayments of Rs 50000 0 at the beginning of each year for next 8 years The annual compound interest rate charged by the financial institution is 18 You are also required to calculate both Present value and Future value for these repayments Due to c urrent economic crises it is also expected that interes t rate charged by the banks may increase up to 20 I f it is so then what would be the influence on FV AND PV of repayments Also briefly discuss that which rate is more favorable for company under sensitivity analysis

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Posted on Oct 04, 2024

ABC Company Ltd. i s working in food and beverages industry and is producer of Fruit Juices. The management of company is thinking to expand

ABC Company Ltd. is working in food and beverages industry and is producer of Fruit Juices. The management of company is thinking to expand its business by adding a new product line Rabri Milk during this summer. The company is expecting that by introducing this new drink the company will be able to increase its sales from Rs.70,00,000 to Rs.91,00, 000 which is 30% growth in sales. Furthermore the firm believes that its assets and liabilities will grow directly with its level of sales. Its profit margin on sales would be 17%, and its dividend-payout ratio is 58%. The accounting Department of company has also formulated Pro forma financial statements to analyze this investment decision against different evaluation criteria. The balance sheet information is provided below both for current status and estimated figures after producing new product.

Balance Sheet	Current Rs. (000)	Pro Forma Rs. (000)
Cash	1100	1200
Accounts Receivable	900	950
Inventories	100	400
Total Current assets	2100	2550
Fixed Assets	2200	2500
Total Assets	4300	5050
Accounts Payable	500	550
Short term Loans	300	700
Current Liabilities	800	1250
Long term Debt	1300	1600
Shareholders Equity	2200	2200
Total Liabilities and Shareholder's Equity	4300	5050

This pro forma balance sheet needs certain adjustments with change in revenue. Therefore from all of the information provided above what do you think should the firm be able to finance growth in sales with retained earnings or forecast increases in debt i.e. (EFN)? You are also required to explain that which gears are usually addressed by management under investment decision.

As the company has financed its total assess with 50% debt. Therefore the company needs to pay its loan amount in equal repayments of Rs. 500000 at the beginning of each year for next 8 years. The annual compound interest rate charged by thefinancial institution is 18%. You are also required to calculate both Present value and Future value for these repayments.Due to current economic crises it is also expected that interest rate charged by the banks may increase up to 20%. If it is so then what would be the influence on FV AND PV of repayments. Also briefly discuss that which rate is more favorable for company under sensitivity analysis.