In2001, the management committee of Lucknow Co. is consideringinvesting $800,000 for the purchase of machinery and equipment inorder to increase the productivity of the plant. In 2000, thecompany's sales revenue amounted to $2,800,000, goodspurchased from suppliers totaled $600,000 and income after taxeswas $280,000. The company's 2000 balance sheet is asfollows:
In2001, management expects sales revenue to increase by 10% and, withcutbacks in different segments of their operations, return on salesis expected to improve to 12%. Cost of goods sold as apercentage of sales revenue is expected to show an improvement andreach 20%. Depreciation is expected to total $100,000.
(Note: not all the information given in the problem isrequired to answer the questions for the assignment)
Questions:
1.What are the company's current assets?
2.What are the company's current liabilities?
3.What are the company's total assets?
4.What are the company's total liabilities?
5.What are the company's total liabilities and equity?
6.Calculate the company's return on assets for the year2000.
7.What is the net income after taxes for 2001?
8.Calculate the company's average daily sales in 2000?
9.Calculate the company's average collection period for2000.
10.Calculate the company's inventory turnover?
11.Management also expects improvements in the working capitalaccounts. The company's objective is to improveaccounts receivable by eight days, and turn inventory around by 0.2turns faster. a) How much cash will be generated fromaccounts receivable in 2001? b) From inventory in 2001?
12.If the cash that will be generated by internal operations in 2001is $517, 471 then how much will management have to borrow to proceed with the $800,000 investment? (This might be easierthan you think?)
Suppose that to raise the $800,000 the company had $150,000 inretained earnings they were willing to use. Normally theywould expect a 10% return on this money. The bank has agreedto lend them $200,000 at an interest rate of 9%. Theremaining amount will come from a second bank loan at 14%. Ifthe company expects to pay 30% income tax what will their after taxcost of capital be for the equipment?