Chance CorpCo is planning on investing $2,400,000 in a brewery. If they use a lo
ID: 2651761 • Letter: C
Question
Chance CorpCo is planning on investing $2,400,000 in a brewery. If they use a low liquidity asset management system their EBIT will be 12.5% of their assets and if they use a high liquidity plan it will be 8.5% of their assets. They have access to long-term financing at the bank for 7% and short-term through a LOC of 5.5%. They will finance all of their assets with debt. Their tax rate is 40%. Please calculate net income with the most aggressive plan, the most conservative plan and both hybrid plans. Please show your computations and label each plan. Also, please provide the degree of financial leverage for all 4 plans.
Explanation / Answer
Ans
Detail Most Aggressive Plan Most Conservative Plan Moderate Aggressive Plan Moderate Conservative Plan Investment 24,00,000.00 24,00,000.00 24,00,000.00 24,00,000.00 EBIT % 12.50% 8.50% 11.00% 10.00% EBIT 3,00,000.00 2,04,000.00 2,64,000.00 2,40,000.00 Funding Long term Debt Long term Debt Long term Debt Long term Debt Debt Rate 7% 7% 7% 7% Short term fund requirement -STFR ( differential EBIT converted to asset terms) 96000/12.5% 0/12.5% 36000/12.5% 60000/12.5% Short term fund requirement -STFR in Value 7,68,000.00 - 2,88,000.00 4,80,000.00 Short term Interest Rate 5.50% 5.50% 5.50% 5.50% Interest Cost 2,10,240.00 1,68,000.00 1,83,840.00 1,94,400.00 EBT 89,760.00 36,000.00 80,160.00 45,600.00 Tax rate 40% 40% 40% 40% EAT 53856 21600 48096 27360 Degree of Financial Leverage EBIT/EBT 3.34 5.67 3.29 5.26Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.