Alpex Company is public company listed in the Colombo Stock Exchange. You are provided the following summarized balance sheet as at 31st March 2018.
The summarized balance sheet of the company as at 31/03/2018 is as follows:
| (Rs. ‘000) | | |
Equity capital (Rs.10/- each) | 5,200 | | property, Plant and equipment | 6,000 |
Reserves | 2,000 | | Motor vehicle | 5,000 |
Retained profit | 1,200 | | Inventory | 300 |
14.6% - Bonds | 4,600 | | Trade debtors | 2,500 |
Trade creditors | 1,800 | Cash and bank balance | 1,000 |
| 14,800 | | | 14,800 |
The company is planning to invest in a personnel training programme in the next year. Investment outlay, Rs. 1,000,000/- will be charged off as an expense by the firm in next year. The returns from the programme in the form of greater productivity and a reduction in employee turnover are estimated as follows (on an after-tax basis):
Years 1-10 Rs.150,000 per annum
Years 11-15 Rs.100,000 per annum
The Company’s new financing policy is to finance its assets with 60% equity (book value) and the balance with long-term debt. Any adjustment at the end of accounting year is to be done by the use of additional bond at 12%. Company’s cost of equity was at 15% in the past and also expects to maintain its new capital structure policy for the explicit future period.
The company plans to issue bond and uses the proceeds to increase its inventory by 200%, to increase Plant and Equipment by Rs. 1.4 million and to decrease trade debtors by Rs. 1 million. The company expects that next year’s net profit after taxes would be Rs. 3.2 million.
Income tax rate is 35%.
You are required to:
a ). Estimate weighted average cost of capital of the company after implementing new financing policy.
b ). Assess the investment project based on net present value criteria and decide whether the company should undertake the training programme? Why?
c ). Assess the requirement of new issue of bond capital in order to consistent with new capital structure policy.
d ). Prepare new balance sheet immediately after implementing new proposals (ignore other changes).
e ). Discuss the immediate impact of the changes in balance sheet item on the following ratios? Current ratio, Quick ratio, Debt to total assets ratio, and ROE
State any assumptions that you made.
(40 marks)
Please do in excel and upload. for each question open a new sheet. shortcuts are not allowed