Khurram Ali is negotiating his employment contract. His opportunity cost is 15%. He has been offered two possible 4-year contracts. Payments are in Pakistani rupees and are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows: Contract     Year 1   Year 2      Year 3    Year 4 Contract 1  4M        4 M          4 M        4 M Contract 2  10M      1M          1M          1M As his financial adviser, which contract would you recommend that he accept

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

Hassan textile anticipates reaching a sales level of Rs. 6 million in one year. The company expects earnings after taxes during the next year to equal Rs.400,000. During the past several years, the company has been paying Rs.50,000 in dividends to its stockholders. The company expects to continue this policy for at least the next year. The actual balance sheet and income statement for Hassan textile during 2018 follow.
Hassan textile Ltd. Balance Sheet as of December 2018
Cash
Rs. 200,000
Accounts payable
Rs. 600,000
Account Receivables
400,000
Notes payable
500,000
Inventories
1,200,000
Long-term debt
200,000
Fixed Assets, net
500,000
Stockholders’ equity
1,000,000
Total Assets
Rs. 2,300,000
Total liabilities and equity
Rs. 2,300,000
Hassan textile Ltd. Income Statement for the Year ending December 2018
Sales
Rs. 4,000,000
Expenses, including interest and taxes
Rs. 3,700,000
Earnings after taxes
Rs. 300,000
a. Using the percentage of sales method, calculate the additional financing Hassan textiles Ltd. will need over the next year at the Rs. 6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2019, assuming that a sales level of Rs. 6 million is reached. Assume that the additional financing needed is obtained in the form of additional notes payable.
b. If the Hassan textile’s banker requires the company to maintain a current ratio equal to 1.6 or greater, what is the maximum amount of additional financing that can be in the form of bank borrowings (notes payable)? What other potential sources of financing are available to the company?

Khurram Ali is negotiating his employment contract. His opportunity cost is 15%. He has been offered two possible 4-year contracts. Payments are in Pakistani rupees and are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows:
Contract     Year 1   Year 2      Year 3    Year 4

Contract 1  4M        4 M          4 M        4 M

Contract 2  10M      1M          1M          1M
As his financial adviser, which contract would you recommend that he accept

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps with 1 images

Blurred answer
Knowledge Booster
Forecasting Financial Statement
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education