1- Lolli pop Inc. is a manufacture of candies with natural flavors and natural c
ID: 2620866 • Letter: 1
Question
1- Lolli pop Inc. is a manufacture of candies with natural flavors and natural colors. This company ofers higher quality candies at higher prices then its competitors. October, December and March are the months where their sales peak. The owners of this company are conservative, and they keep high levels of currents assets to ensure they have high liquidity. Their current ratio is 2.00 which is well above the industry average of 1.20. One of the machines used to melt the sugar is not working properly and they will need to replace it for a newer machine with a value of $700,000. The current long-term rate is 11%, and the current short-term rate is 8.5%. The firm's tax rate is 40%. The owners are not sure how to finance their assets, how much of long-term debt and how much of short term debtExplanation / Answer
D) I would recommend the aggressive approach. The interest expense under aggressive approach is less. Considering company sales at a higher price than competitors it should have enough cashflows to pay off the short term loans. Also the current ratio is high which shows company has high liquidity which means it has abiltiy to pay off loans faster.
E) In case the current ratio was below 1, I would recommend the conservative approach as it will affect current ratio less than the aggressive approach. Low current ratio means company does not have enough current assets to cover its liablities. Hence Plan A is recommended.
A) Plan A- Conservative Plan B - Aggressive Short Term Loan 140000 280000 (20%*700000) (40%*700000) Long Term Loan 560000 420000 (80%*700000) (60%*700000) Total Financing Needed 700000 700000 B) Plan A Plan B EBIT (a) 100000 100000 Short Term Interest (b) 11900 23800 (140000*8.5%) (280000*8.5%) Long Term Interest('c) 61600 46200 (560000*11%) (420000*11%) Earnings befor taxes (d=a-b-c) 26500 30000 Taxes @ 40% ('e) 10600 12000 Net Income (f=d-e) 15900 18000Related Questions
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