: Mr. Daniel Kim, the CFO of Gangnam Corp. plans to conduct a series of financial...

  

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: Mr. Daniel Kim, the CFO of Gangnam Corp. plans to conduct a series of financial ratio analyses using comparative balance sheets and comprehensive income statement for the fiscal year of 2×19 as follows. In addition, Mr. Kim estimated the weighted cost of capital of Gangnam Corp. at 10% per annum for the same fiscal year. Assets Cash Short-term lending Accounts receivable Inventories Building Land Comparative Balance Sheets Liabilities and Shareholders 2×19 2×18 Equity 2x19 2×18 50 40 120 100 320 300 350 410 780 600 280 250 Intangible assets 40 50 Total Assets 1,940 1,750 Expenses Cost of goods sold G&A expense Interest expense Income tax expense Net income Other Cl CT Account payable 150 120 Advances from 60 50 customers Short-term borrowings Long-term borrowings Bonds payable Paid-in Capital Retained Earnings 140 Liabilities and Equity Total 2×19 Revenues 3,500 Net sales revenue 800 60 60 140 100 80 footnote (1): In the above balance sheet, short-term loan is one of financial assets, and the other assets belong to operating assets. On the other hand, short-term and long-term borrowings along with bonds payable are financial liabilities, debt), while other liabilities are classified as operating liabilities. 250 250 400 400 500 500 350 Comprehensive Income Statement Interest revenue Gain on sales of tangible asset 480 1,940 1,750 2×19 4,500 20 40 footnote (2): Both Interest revenue and expense are financial items, while the other items are all operating items. In addition, there is no OCI (other comprehensive income). Required 1: Compute financial ratios below. (5 points each, marginal tax rate = 30%) ⒸROE(Return on Equity) for the year 2×19. ROE = Net income/(Beginning Balance of equity + Ending balance of equity)+2 ⒸRNOA (Return on Net Operating Asset) of 2×19. where RNOA = Net operating income (after tax)/(Beginning NOA + Ending NOA)+2, and Net Operating assets (NOA) = Operating assets - Operating liabilities. Net operating income after tax = (Operating revenue- Operating expense) x (1-marginal tax rate) 3 Net Borrowing Cost Ratio of 2×19 Net Borrowing Cost (NBC) ratio = Net Borrowing Cost after tax/(Net financing liabilities at the year beginning + Net financing liabilities at the year-end)+2. Net Borrowing Cost after tax = (Interest expense - Interest revenue) x (1 - marginal tax rate) Net financing liabilities Financing liabilities - Financial assets 4 Residual Operating Income (ReOI) of 2×19. ReOI = Net operating income of 2×19-Net Operating assets at the end of 2x18x Weighted average cost of capital Required 2: If you are a financial advisor to Mr. Kim and it is expected that both RNOA and NBC ratio will be constant for the next several year, do you believe that a borrowing expansion strategy from outside is rational for Gangnam Corp? Suggest the reason for your judgement. (5 points) : Mr. Daniel Kim, the CFO of Gangnam Corp. plans to conduct a series of financial ratio analyses using comparative balance sheets and comprehensive income statement for the fiscal year of 2×19 as follows. In addition, Mr. Kim estimated the weighted cost of capital of Gangnam Corp. at 10% per annum for the same fiscal year. Assets Cash Short-term lending Accounts receivable Inventories Building Land Comparative Balance Sheets Liabilities and Shareholders 2×19 2×18 Equity 2x19 2×18 50 40 120 100 320 300 350 410 780 600 280 250 Intangible assets 40 50 Total Assets 1,940 1,750 Expenses Cost of goods sold G&A expense Interest expense Income tax expense Net income Other Cl CT Account payable 150 120 Advances from 60 50 customers Short-term borrowings Long-term borrowings Bonds payable Paid-in Capital Retained Earnings 140 Liabilities and Equity Total 2×19 Revenues 3,500 Net sales revenue 800 60 60 140 100 80 footnote (1): In the above balance sheet, short-term loan is one of financial assets, and the other assets belong to operating assets. On the other hand, short-term and long-term borrowings along with bonds payable are financial liabilities, debt), while other liabilities are classified as operating liabilities. 250 250 400 400 500 500 350 Comprehensive Income Statement Interest revenue Gain on sales of tangible asset 480 1,940 1,750 2×19 4,500 20 40 footnote (2): Both Interest revenue and expense are financial items, while the other items are all operating items. In addition, there is no OCI (other comprehensive income). Required 1: Compute financial ratios below. (5 points each, marginal tax rate = 30%) ⒸROE(Return on Equity) for the year 2×19. ROE = Net income/(Beginning Balance of equity + Ending balance of equity)+2 ⒸRNOA (Return on Net Operating Asset) of 2×19. where RNOA = Net operating income (after tax)/(Beginning NOA + Ending NOA)+2, and Net Operating assets (NOA) = Operating assets - Operating liabilities. Net operating income after tax = (Operating revenue- Operating expense) x (1-marginal tax rate) 3 Net Borrowing Cost Ratio of 2×19 Net Borrowing Cost (NBC) ratio = Net Borrowing Cost after tax/(Net financing liabilities at the year beginning + Net financing liabilities at the year-end)+2. Net Borrowing Cost after tax = (Interest expense - Interest revenue) x (1 - marginal tax rate) Net financing liabilities Financing liabilities - Financial assets 4 Residual Operating Income (ReOI) of 2×19. ReOI = Net operating income of 2×19-Net Operating assets at the end of 2x18x Weighted average cost of capital Required 2: If you are a financial advisor to Mr. Kim and it is expected that both RNOA and NBC ratio will be constant for the next several year, do you believe that a borrowing expansion strategy from outside is rational for Gangnam Corp? Suggest the reason for your judgement. (5 points)