Reference no: EM132512243
KHO BID MANUFACTURING COMPANY
Pro-Forma Statement of Financial Position
As of December 31, 2019
Cash P20,000 Current Liabilities (10%) P200,000
Marketable securities 30,000 Long-term Liabilities (15%) 300,000
Accounts receivable 150,000 Total Liabilities P500,000
Inventory 200,000
Total Current Assets P400,000
Net Fixed Assets P600,000 Stockholders' equity P500,000
TOTAL ASSETS P1,000,000 TOTA LIAB. & Equity P1,000,000
- During 2019, firm's earnings before interest and taxes were 20% of P800,000 in sales. The income tax rate is 34%.
Required:
Question a. Determine the level of working capital, net working capital and current ratio.
Question b. Calculate the return on equity.
- Kho Bid Manufacturing Company decides to examine its working capital policy. In addition to its current strategy of maintaining current assets at 50% of sales, the company is considering two other strategies based on current assets at 30% or 70% of next year's sales. Projected net sales and fixed assets for next year are P1,000,000 and P600,000, respectively. The company plans to maintain its existing capital structure of 50% debt and 50% equity. Current liabilities are to be 40% of projected total liabilities.
Required:
Question c. Calculate the company's net working capital and current ratio under each of the three strategies.
Question d. Explain what effect these strategies would have on the company's liquidity.
Refer to (b) and the following information about the Kho Bid Manufacturing Company to solve for € and (f).
- Kho Bid expects its earnings before interest and taxes in 2020 to be 18% of P1,000,000 in sales. Interest rates are projected to remain at 10% for short-term debt and 15% for long-term debt. The firm's tax rate will be 34%.
Required:
Question e. What is the company's rate of return on equity for each of the three strategies?
Question f. Describe the relationship between the company's liquidity and profitability.