A company is considering working capital investment for next year. Estimated fixed assets and current liabilities for next year are Rs. 2.60 crore and Rs. 2.34 crore respectively. Sales and EBIT depend upon current asset investment. Company is considering following alternative policies: Working cap policy Investment in CA Estimated sales (crores) EBIT (crores) Conservative 4.50 12.30 1.23 Moderate 3.90 11.50 1.15 aggressive 2.60 10.00 1.00 Calculate: rate of return on total assets, net working capital position, current ratio, current assets to fixed assets ratio for each policy. Discuss risk-return trade-off for each policy Assuming that in above question firm takes moderate policy. The company is now examining use of short-term and long-term borrowing for its financing. The company will use Rs. 2.50 crore as equity. Corporate tax rate is 35%. Following debt alternatives are available: Financing policy ST debt @ 12% LT debt @16% Conservative 0.54 1.12 Moderate 1 0.66 aggressive 1.50 0.16 Determine: rate of return on equity, net-working capital position, current ratio. Evaluate return-risk trade-off for each policy.
A company is considering working capital investment for next year. Estimated fixed assets and current liabilities for next year are Rs. 2.60 crore and Rs. 2.34 crore respectively. Sales and EBIT depend upon current asset investment. Company is considering following alternative policies:
|
Working cap policy |
Investment in CA |
Estimated sales (crores) |
EBIT (crores) |
|
Conservative |
4.50 |
12.30 |
1.23 |
|
Moderate |
3.90 |
11.50 |
1.15 |
|
aggressive |
2.60 |
10.00 |
1.00 |
Calculate: rate of
Assuming that in above question firm takes moderate policy. The company is now examining use of short-term and long-term borrowing for its financing. The company will use Rs. 2.50 crore as equity. Corporate tax rate is 35%. Following debt alternatives are available:
|
Financing policy |
ST debt @ 12% |
LT debt @16% |
|
Conservative |
0.54 |
1.12 |
|
Moderate |
1 |
0.66 |
|
aggressive |
1.50 |
0.16 |
Determine: rate of
Evaluate return-risk trade-off for each policy.
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