Mgt201 Financial Management GDB No. 1 solution Fall 2011

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Fall Semester 2011
“Financial Management (MGT201)”

This is to inform that Graded Discussion Board (GDB) has been opened according to the following schedule 

Schedule:

Opening Date and Time
October 24, 2011 At 12:01 AM 

Closing Date and Time
October 26, 2011 At 11:59 PM

ABC Company is a sugar manufacturing and its position as on 31st December, 2010 is as follows:

ABC Company
Balance Sheet
As on 31st December, 2010

Assets
Rs.
Liabilities and Owner’s Equity
Rs.

Current Assets
15,468
Current Liabilities
8,521

Land & Building
179,589
Long term Debts
96,895

Plant & Machinery
253,463
Loan for plant & machinery
253,463

Equity
89,641

Total Assets
448,520
Total Liabilities
448,520


This Balance Sheet also shows that ABC Company took loan from financial institution to purchase plant & machinery for Rs. 253,463. 

Keeping the given information into consideration, you are required to answer the following: 

1. What would be Debt Ratio before taking loan? 
2. What would be Debt Ratio after taking loan? 
3. Please comment that how the change in Debt Ratio would affect the decision of the financial institution if the company requests for further loan? 


Solution:



This is an Idea solution by Asad Munir pls do not copy paste as it is. Intellectual and positive comments will be appreciated


Question No. 1


Cost of equity = [9 / (80-5)] + .05 = 0.17
Cost of preferred stock = 9/90 = .10


WACC = rD XD. (1-Tax) + rP XP + rE XE .
WACC = .30 x .13 (1-.35) + .30 x .10 + .40 x 0.17
WACC = 0.02535 + .03 + 0.068
WACC = 0.12335
WACC = 12.335


Question No. 2


Break even point in units = Fixed expenses / Unit contribution margin


Break even point in units Firm A = 24600 / (16-6.75) = 2660
Break even point in units Firm B =30600 / (20-9.75) = 2985

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Mgt201 GDB solution


Formula:
Total asset before taking loan =448,520-253463
                                =195057


Total liabilities before taking loan = 448,520-253463
                                     =195057
Debt Ration = 195057/195057
                                       =1 times


Total asset after taking loan =448,520


Total liabilities after taking loan = 448,520


Debt Ration = 448520/448520
                                      =1 times


So this loan which is taking for purchase of plant and machinery does not affect the Debt ration of the firm 


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Intellectual and positive comments will be appreciated




Question No. 1




Cost of equity = [9 / (80-5)] + .05 = 0.17
Cost of preferred stock = 9/90 = .10




WACC = rD XD. (1-Tax) + rP XP + rE XE .
WACC = .30 x .13 (1-.35) + .30 x .10 + .40 x 0.17
WACC = 0.02535 + .03 + 0.068
WACC = 0.12335
WACC = 12.335




Question No. 2




Break even point in units = Fixed expenses / Unit contribution margin




Break even point in units Firm A = 24600 / (16-6.75) = 2660 
Break even point in units Firm B =30600 / (20-9.75) = 2985




1. 105416 Debt/ assets195057 = 0.5404 
2. 358879 Debt / assets 448520 = 0.8001
3. If Company Request the further loan Financial consider the ABC more risky then before and may give loan on high interest rate or even it may reject the 


loan . Because in case of giving further loan to ABC Debt ratio will be increase that’s not healthy sighn for ABC co.


formula of Debt Ratio 
1.Before Loan =Total Debt/Total Equity
105416/89641=1.17
2.after loan = 340879/89641=3.8


total debt = 96895 (Long term Debts) + 8521 (Current Liabilities)
total debt = 105416
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