Question
Q#1( 08 )ASF and Company is planning to introduce a new line of products that would involve increasing its current assets by 40 million its
Q#1( 08 )ASF and Company is planning to introduce a new line of products that would involve increasing its current assets by 40 million its existing and new assets structures are
Details | Existing | New |
Current assets | 25 | 40 |
Fixed assets | 175 | 175 |
Total assets | 200 | 215 |
Its existing financial structure which includes financing certain new fixed assets but not the 15 million increases in current assets is
A/c Payable | 15% of total equity |
Accrued wages | 10% of total equity |
Long-term debts old 15% | 25% of total equity |
Equity | 50% of total equity |
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According to the vice president of finance for ASF once the new products are in production and distribution a/c payable and accrued wages will increase to 10 % of original value respectively and will finance part of the increased working capital requirement. Remaining will have to be raised by borrowing on a bank credit line at 10% and borrowing on a 10-year note form an insurance company at a 12% interest rate. For the coming year ASF expects earnings before interest and taxes 15 % of total assets after the new product and tax rate 50%
Required
Company is considering three alternatives for financing working capital requirements the conservative approach would in financing with all financing with in long term debts the middle of the road approach would use 50% form long term and 50% from short term. The aggressive approach would alternative entail borrowing on the credit line. Evaluate the return on equity for each alternative .Which alternative would you recommend Why?
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