on 30 June 2014, whereas Woolworths Lid (WOW) had 1248 million 14 earnings level
ID: 2780960 • Letter: O
Question
on 30 June 2014, whereas Woolworths Lid (WOW) had 1248 million 14 earnings levels found in Study Problems our 15-9 and 15-10. level of ng. Given both firms' levels operating and assuming a 30% tax rate for both firms, what is their break-even for both firms)? MINI-CASE On 31 January 2014, Sigma (SIP) Morcover reported the following sources of financing in its balance net profit of s ceuticals Ltd (SIP) Moreover, the firm's 2014 income statement reported 53.5 million with very little interest expense Sigma Pharmaceuticals Ltd Balance Sheet (31 January 2014) (resulting from short-term borrowing throughout the year for cash-management purposes): Sigma Pharmaceuticals Ltd Income Statements Financial structure (31 January 2014) Liabilities Current liabilities Eanings before interest and tax $70 300 2000 68 300 (14800) $53 500 $353 100 term/current debt Other current liabilities Interest expense Profit before tax 11 300 Income tax expense $364 400 Net profit Other long-term liabilities Long-term liabilities Shareholders' equity Total liabilities and shareholders Ltd, 2013-2014 Annual Report, 2000 s 2000 $578 800 $945200 If Sigma's management were considering the possibility of using significant debt financing for the first time, it might look at CSL Ltd (CSL), Australia's largest pharmaceutical company, as a benchmark firm for comparison purposes. CSL used debt financing, as shown on the following balance sheet and income statement: Ltd. 2013-2014 Annual ReportExplanation / Answer
1. The debt ratio of CSL is calculated as follows:
The ratio of less than 50% is considered a favourable solvency ratio whihc means the less than 50% of assets are funded by debts.
Interest bearing debt ratio:
The interest bearing debt ratio also looks favourable in this case as the equity is about 1.67 times that of the interest bearing debt
2. Interest coverage ratio: This ratio indicates how easily the company can carry out the payment obligation towards interest expense
If CSL pays off $200 Mn in debt, the interest expense too would come down, in which case it would further increase the interest paying capacity of the company. The question does not provide details about depreciation and amortization, hence calculation of EBITDA (earnings before interest, tax, depreciation and amortization) is not possible.
3. If Sigma decides to follow CSL in this, the Interest bearing debt ration should be 59.78%, the total long tem debt should be :
346,017
The number of shares is also reduced by 59.68% = 646,931,200
Remaining shares = 437068800
If the above amount is financed by 8% interest bearing bonds:
4. There are several advantages of utilizing debt financing. Some these are- Control over company can be retained, Tax benefits,The lender does not have any claim on the net profits threreby increasing the EPS of the company, Cash flow forecast is affected favourably as the interest and principal payment is known beforehand.
Debt Ratio = Total debt/ Total Assest 49.63% Total debt = current liabilities+Long term liabilities 3,115,700 Total Assets =total liabilities+Equity 6,277,700Related Questions
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