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 Stockholders’ equity 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 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. 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?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter4: Financial Planning And Forecasting

Section: Chapter Questions

Problem 7P

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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	Stockholders’ equity	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

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.
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?

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