Khurram Ali is negotiating his employment contract. His opportunity cost is 15%. He has been offered two possible 4-year contracts. Payments are in Pakistani rupees and are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows: Contract Year 1 Year 2 Year 3 Year 4 Contract 1 4M 4 M 4 M 4 M Contract 2 10M 1M 1M 1M As his financial adviser, which contract would you recommend that he accept
Hassan textile anticipates reaching a sales level of Rs. 6 million in one year. The company expects earnings after taxes during the next year to equal Rs.400,000. During the past several years, the company has been paying Rs.50,000 in dividends to its stockholders. The company expects to continue this policy for at least the next year. The actual balance sheet and income statement for Hassan textile during 2018 follow.
Hassan textile Ltd. Balance Sheet as of December 2018
Cash
Rs. 200,000
Accounts payable
Rs. 600,000
Account Receivables
400,000
Notes payable
500,000
Inventories
1,200,000
Long-term debt
200,000
Fixed Assets, net
500,000
1,000,000
Total Assets
Rs. 2,300,000
Total liabilities and equity
Rs. 2,300,000
Hassan textile Ltd. Income Statement for the Year ending December 2018
Sales
Rs. 4,000,000
Expenses, including interest and taxes
Rs. 3,700,000
Earnings after taxes
Rs. 300,000
a. Using the percentage of sales method, calculate the additional financing Hassan textiles Ltd. will need over the next year at the Rs. 6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2019, assuming that a sales level of Rs. 6 million is reached. Assume that the additional financing needed is obtained in the form of additional notes payable.
b. If the Hassan textile’s banker requires the company to maintain a current ratio equal to 1.6 or greater, what is the maximum amount of additional financing that can be in the form of bank borrowings (notes payable)? What other potential sources of financing are available to the company?
Khurram Ali is negotiating his employment contract. His
Contract Year 1 Year 2 Year 3 Year 4
Contract 1 4M 4 M 4 M 4 M
Contract 2 10M 1M 1M 1M
As his financial adviser, which contract would you recommend that he accept
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