XYZ Limited has the following balance sheet as on 31 December 2020: 1 Fixed Assets Current...

 

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XYZ Limited has the following balance sheet as on 31" December 2020: 1 Fixed Assets Current assets less current liabilities Share capital Reserves Long term 10% debt 3,500,000 500,000 4,000,000 500,000 1,600,000 1,900,000 4,000,000 The company's strategic planners have formulated the following policies. 1. By the end of the year ended 31 December 2021, gearing will not exceed 100% i.e. long term debt will not exceed the total of share capital and reserves. 2. The company will pay 50% of its profits as dividend to share holders. The following estimates have been made. 1. Each Rs.10,000/- of assets generated profits of Rs.2,000 per annum before interest. 2. The current market cost of debt capital is 15% per annum. Required The company would like to invest further Rs.500,000 but does not intend to make a share issue to raise the finance. Advise its management as whether it should borrow the money and still achieve its strategic targets by the end of year 2021? (Ignore tax rate and asset depreciation) XYZ Limited has the following balance sheet as on 31" December 2020: 1 Fixed Assets Current assets less current liabilities Share capital Reserves Long term 10% debt 3,500,000 500,000 4,000,000 500,000 1,600,000 1,900,000 4,000,000 The company's strategic planners have formulated the following policies. 1. By the end of the year ended 31 December 2021, gearing will not exceed 100% i.e. long term debt will not exceed the total of share capital and reserves. 2. The company will pay 50% of its profits as dividend to share holders. The following estimates have been made. 1. Each Rs.10,000/- of assets generated profits of Rs.2,000 per annum before interest. 2. The current market cost of debt capital is 15% per annum. Required The company would like to invest further Rs.500,000 but does not intend to make a share issue to raise the finance. Advise its management as whether it should borrow the money and still achieve its strategic targets by the end of year 2021? (Ignore tax rate and asset depreciation)

Answer rating: 100% (QA)

To advise the management on whether the company should borrow Rs 500000 and still maintain its strategic targets by the end of year 2021 we need to ev... View the full answer