Question 01
A Company presently has total assets of Rs 3.2 million. In the total assets current assets are of Rs 0.2 millions. Sales of the corporate are Rs 10 million annually, and the before tax net profit margin is 12%. (Assume that the firm currently has no interest bearing debt).
Given the renewed fears of potential cash insolvency, an overly strict credit policy and imminent stockouts, the corporation is considering higher levels of current assets as a buffer against adversity.
The Management of the corporation is considering two new levels of currents i.e. Rs 0.5 million and Rs 0.8 million instead of the Rs 0.2 million presently held. Any additions to current assets would be financed with new equity capital.
A. Calculate the following ratios under the three levels of current assets. Also give your comments.
a) Total assets turnover
b) Before - tax return on Investment
c) Before - tax profit margin
B. If the new additions to current assets were financed with long - term debt at 15% interest, what would be the before - tax interest charges of the two new policies.
Question 02
A Public Limited Company is planning to borrow Rs.15 million in six months time for a six month period. The normal terms of borrowing prevailing in the market are KIBOR + 75 basis points. Current KIBOR rate is 8.5%. The company anticipates a surge in interest rates in the near future.
The quoted FRA rates are as under:
3V9 = 8.75 - 8.65
6V12 = 8.69 - 8.59
a) How the company can set up hedge against interest rate using FRA?
b) Assume that on the settlement date KIBOR is 9.05%. Calculate the effective interest rate of the company's borrowings.