Hello, Can you please help me with the following question and plese show your wo
ID: 2732689 • Letter: H
Question
Hello, Can you please help me with the following question and plese show your work in the answer. I am analyzing The Gap, Inc. for my class, I have attached their balance sheet and income statement for your reference. The balance sheet is on the first tab and the income statement is on the second tab. Here is the question:
Assume you will finance the project with a 10-year bond issuance (debt). The bonds will carry an interest rate of 4%. One tenth of the bond principal will be retired (paid off) per year until the bond is fully paid off in 10 years.
Complete the following:
Calculate the annual debt service (principal and interest) for each of the 10 years.
Calculate the current working capital for your company using the balance sheet from yahoo.finance.com. Can the company afford the increase in debt payments each year?
Answer the following: How do the results of these calculations impact the project? Explain the results of your analyses.
Balance Sheet
Get Balance Sheet for:
View: Annual Data
All numbers in thousands
Period Ending
Jan 30, 2016
Jan 31, 2015
Feb 1, 2014
Assets
Current Assets
Cash And Cash Equivalents
1,370,000
1,515,000
1,510,000
Short Term Investments
-
-
-
Net Receivables
-
-
-
Inventory
1,873,000
1,889,000
1,928,000
Other Current Assets
742,000
913,000
992,000
Total Current Assets
3,985,000
4,317,000
4,430,000
Long Term Investments
-
-
-
Property Plant and Equipment
2,850,000
2,773,000
2,758,000
Goodwill
-
-
-
Intangible Assets
-
-
-
Accumulated Amortization
-
-
-
Other Assets
638,000
600,000
661,000
Deferred Long Term Asset Charges
-
-
-
Total Assets
7,473,000
7,690,000
7,849,000
Liabilities
Current Liabilities
Accounts Payable
2,114,000
2,213,000
2,420,000
Short/Current Long Term Debt
421,000
21,000
25,000
Other Current Liabilities
-
-
-
Total Current Liabilities
2,535,000
2,234,000
2,445,000
Long Term Debt
1,310,000
1,332,000
1,369,000
Other Liabilities
1,083,000
1,141,000
973,000
Deferred Long Term Liability Charges
-
-
-
Minority Interest
-
-
-
Negative Goodwill
-
-
-
Total Liabilities
4,928,000
4,707,000
4,787,000
Stockholders' Equity
Misc Stocks Options Warrants
-
-
-
Redeemable Preferred Stock
-
-
-
Preferred Stock
-
-
-
Common Stock
20,000
21,000
55,000
Retained Earnings
2,440,000
2,797,000
14,218,000
Treasury Stock
-
-
-14,245,000
Capital Surplus
-
-
2,899,000
Other Stockholder Equity
85,000
165,000
135,000
Total Stockholder Equity
2,545,000
2,983,000
3,062,000
Net Tangible Assets
2,545,000
2,983,000
3,062,000
Income Statement
Get Income Statement for:
View: Annual Data
All numbers in thousands
Period Ending
30-Jan-16
31-Jan-15
1-Feb-14
Total Revenue
15,797,000
16,435,000
16,148,000
Cost of Revenue
10,077,000
10,146,000
9,855,000
Gross Profit
5,720,000
6,289,000
6,293,000
Operating Expenses
Research Development
-
-
-
Selling General and Administrative
-
-
-
Non Recurring
-
-
-
Others
-
-
-
Total Operating Expenses
-
-
-
Operating Income or Loss
1,524,000
2,083,000
2,149,000
Income from Continuing Operations
Total Other Income/Expenses Net
6,000
5,000
5,000
Earnings Before Interest And Taxes
1,530,000
2,088,000
2,154,000
Interest Expense
59,000
75,000
61,000
Income Before Tax
1,471,000
2,013,000
2,093,000
Income Tax Expense
551,000
751,000
813,000
Minority Interest
-
-
-
Net Income From Continuing Ops
920,000
1,262,000
1,280,000
Non-recurring Events
Discontinued Operations
-
-
-
Extraordinary Items
-
-
-
Effect Of Accounting Changes
-
-
-
Other Items
-
-
-
Net Income
920,000
1,262,000
1,280,000
Preferred Stock And Other Adjustments
-
-
-
Net Income Applicable To Common Shares
920,000
1,262,000
1,280,000
Balance Sheet
Get Balance Sheet for:
View: Annual Data
All numbers in thousands
Period Ending
Jan 30, 2016
Jan 31, 2015
Feb 1, 2014
Assets
Current Assets
Cash And Cash Equivalents
1,370,000
1,515,000
1,510,000
Short Term Investments
-
-
-
Net Receivables
-
-
-
Inventory
1,873,000
1,889,000
1,928,000
Other Current Assets
742,000
913,000
992,000
Total Current Assets
3,985,000
4,317,000
4,430,000
Long Term Investments
-
-
-
Property Plant and Equipment
2,850,000
2,773,000
2,758,000
Goodwill
-
-
-
Intangible Assets
-
-
-
Accumulated Amortization
-
-
-
Other Assets
638,000
600,000
661,000
Deferred Long Term Asset Charges
-
-
-
Total Assets
7,473,000
7,690,000
7,849,000
Liabilities
Current Liabilities
Accounts Payable
2,114,000
2,213,000
2,420,000
Short/Current Long Term Debt
421,000
21,000
25,000
Other Current Liabilities
-
-
-
Total Current Liabilities
2,535,000
2,234,000
2,445,000
Long Term Debt
1,310,000
1,332,000
1,369,000
Other Liabilities
1,083,000
1,141,000
973,000
Deferred Long Term Liability Charges
-
-
-
Minority Interest
-
-
-
Negative Goodwill
-
-
-
Total Liabilities
4,928,000
4,707,000
4,787,000
Stockholders' Equity
Misc Stocks Options Warrants
-
-
-
Redeemable Preferred Stock
-
-
-
Preferred Stock
-
-
-
Common Stock
20,000
21,000
55,000
Retained Earnings
2,440,000
2,797,000
14,218,000
Treasury Stock
-
-
-14,245,000
Capital Surplus
-
-
2,899,000
Other Stockholder Equity
85,000
165,000
135,000
Total Stockholder Equity
2,545,000
2,983,000
3,062,000
Net Tangible Assets
2,545,000
2,983,000
3,062,000
Explanation / Answer
1. Calculation of Interest and Principal Amount Bond Amount $ 1 Million(Assumed because not given in question) Interest rate 4% Payment Frequency One-Tenth of Bond Principal Year Opening Balance Interest@4% Payment 1/10th of Principal Payment Total Payment Closing Balance 1 1000000 40000 100000 140000 900000 2 900000 36000 100000 136000 800000 3 800000 32000 100000 132000 700000 4 700000 28000 100000 128000 600000 5 600000 24000 100000 124000 500000 6 500000 20000 100000 120000 400000 7 400000 16000 100000 116000 300000 8 300000 12000 100000 112000 200000 9 200000 8000 100000 108000 100000 10 100000 4000 100000 104000 0 2. Calculating Current Working Capital Working Capital = Total Curret Assets - Total Current Liabilities =3985000 - 2535000 =1450000 3. Can the company afford to increase debt payment each year? To check company affordability, we need to analyse comapny's profitability margin ratio and liquidity ratio. We are calculating profitability ratio just to make it sure that whether comapany is earning as much to repay the debt in excess as scheduled. Also, we are analysing liquidity ratio to determine whether company has sufficient liquidity to arrange cash to be paid for repayment. Profitability Margin = Net Profit / Total Sales * 100 =920000 / 15797000 * 100 =5.82 % Liquidity Ratio = (Current Assets - Inventory )/ Current Liabilities =(3985000 - 1873000 ) / 2535000 =0.83 Decision: Profitability margin or we can say shareholder's yeild is quite low i.e. Only 5.82 % Further company does not have good liquidity(as we know 1 is considered as good liquidity ratio). Company must not go for increasing debt payment.
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