A construction firm has the following abridged balance sheet: Assets GBP `000,000 GBP `000,000 Net fixed assets 70 Cash and Current assets 30 100 Total assets Financed By 7% Debentures 30 Equity capital 60 Current liabilities 10 Total capital 100 Its fixed assets are expected to provide a 15% return over the planned investment horizon. This firm intends to embark on projects that require an initial sinking of £30million and are expected to provide in aggregate a 20% return with a standard deviation of 30% over the planned investment horizon. These projects are to be financed wholly by the internally available funds and the debentures are to be redeemed at the end of the planned investment horizon. For this firm, 

1. Evaluate, stating your assumptions, the probability that the firm is financially better off by embarking on the intended projects; 

2. Assuming that it is only able to earn actual returns of 12% on its fixed assets and 15% on its projects, derive the projected balance sheet at the end of the planned investment horizon; 

Answer rating: 100% (QA)

To evaluate the probability that the firm is financially better off by embarking on the intended projects we need to consider the expected returns and the risks associated with those returns Lets brea... View the full answer