QUESTION ONE:

You have been in existing as a company since 2018. Your Company that deals in Agriculture Products has been performing very well with above market return on investment (ROI). In the recent past, your Chief Finance Officer has been tasked by the Board of Directors to develop an asset financing plan largely because the company is forecasting significant business in the years to come and hence an increase in the asset investments now.

A review of the latest Statement of Financial Affairs showed that Your company has K550,000 temporary Assets and K450,000 in Permanent Current Assets. Further, the Company also has a total of K650,000 in fixed assets. Assume a tax rate of 30%.

Required:

a). Calculate using two alternative financing plans for your company. One of the plans should be conservative, with 90 percent of assets financed by long-term sources, while the other one should be aggressive, with only 56.25 percent of assets financed by long-term sources. Note that the current interest rate is 12 percent on long-term funds and 5 percent on short-term financing. You are also required to compute the annual interest payments under each plan. 10 Marks

b). Calculate earnings after taxes for each of your alternatives given that your companys earnings before interest and taxes are K430,000 5 Marks

c). What would the annual interest and earnings after taxes for the conservative and aggressive strategies in the event that the short-term and long-term interest rates were reversed? 5 Marks

TOTAL=20 Mark