Amtek Company currently has total assets of Rs 3.2 million, of which current assets comprise Rs 0.2 million. Sales are Rs 10 million annually, and the before-tax net profit margin (the firm currently has no interest-bearing debt) is 12 percent. Given renewed fears of potential cash insolvency, an overly strict credit policy, and imminent stock outs, the company is considering higher levels of current assets as a buffer against adversity. Specifically, levels of Rs 0.5 million and Rs 0.8 million are being considered instead of the Rs 0.2 million presently held. Any addition to currents assets would be financed with new equity capital. Determine the total asset turnover, before-tax return on investment, and before-tax net profit margin under the three alternative levels of current assets. If the new additions to current assets were finance with long-term debt at 15 percent interest, what would be the before-tax interest “cost” of the two new policies?
Amtek Company currently has total assets of Rs 3.2 million, of which current assets comprise Rs 0.2 million. Sales are Rs 10 million annually, and the before-tax net profit margin (the firm currently has no interest-bearing debt) is 12 percent. Given renewed fears of potential cash insolvency, an overly strict credit policy, and imminent stock outs, the company is considering higher levels of current assets as a buffer against adversity. Specifically, levels of Rs 0.5 million and Rs 0.8 million are being considered instead of the Rs 0.2 million presently held. Any addition to currents assets would be financed with new equity capital. Determine the total asset turnover, before-tax return on investment, and before-tax net profit margin under the three alternative levels of current assets. If the new additions to current assets were finance with long-term debt at 15 percent interest, what would be the before-tax interest “cost” of the two new policies?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Amtek Company currently has total assets of Rs 3.2 million, of which current assets comprise Rs 0.2 million. Sales are Rs 10 million annually, and the before-tax net profit margin (the firm currently has no interest-bearing debt) is 12 percent. Given renewed fears of potential cash insolvency, an overly strict credit policy, and imminent stock outs, the company is considering higher levels of current assets as a buffer against adversity. Specifically, levels of Rs 0.5 million and Rs 0.8 million are being considered instead of the Rs 0.2 million presently held. Any addition to currents assets would be financed with new equity capital.
- Determine the total asset turnover, before-tax
return on investment , and before-tax net profit margin under the three alternative levels of current assets. - If the new additions to current assets were finance with long-term debt at 15 percent interest, what would be the before-tax interest “cost” of the two new policies?
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