Task 1 A construction firm has the following abridged balance sheet:
Assets GBP `000,000 GBP `000,000
Net fixed assets 70
Cash and Current assets 30
Total assets 100
Financed By
7% Debentures 30
Equity capital 60
Current liabilities 10
Total capital 100
Its fixed assets are expected to provide a 15% return over the planned investment horizon.
This firm intends to embark on projects that require an initial sinking of £30million and are expected to provide in aggregate a 20% return over the planned investment horizon.
These projects are to be financed wholly by the internally available funds and the debentures are to be redeemed at the end of the planned investment horizon.
For this firm,
1. Evaluate, stating your assumptions, the probability that the firm is financially better off by embarking on the intended projects;
2. Assuming that it is only able to earn actual returns of 12% on its fixed assets and 15% on its projects, derive the projected balance sheet at the end of the planned investment horizon;