Referencing Styles : APA Question 1.Zorco Ltd produces widgets that sell for $180 each. Unit sales are presently 7,000 and variable cost per unit is $88.60. Fixed operating costs are $320,000 per year. The firm currently has outstanding debt of $1,200,000 with an interest cost of 10% per annum. It has 10,000 ordinary shares on issues and has forecast an interim dividend of $1 per share. The firm is expecting a 10 percent increase in sales and pays tax at the rate of 30 percent. Based on the firm’s current sales per year … View More Question 1. Zorco Ltd produces widgets that sell for $180 each. Unit sales are presently 7,000 and variable cost per unit is $88.60. Fixed operating costs are $320,000 per year. The firm currently has outstanding debt of $1,200,000 with an interest cost of 10% per annum. It has 10,000 ordinary shares on issues and has forecast an interim dividend of $1 per share. The firm is expecting a 10 percent increase in sales and pays tax at the rate of 30 percent. Based on the firm’s current sales per year and an expected 10% increase in sales calculate the firm’s DOL, DFL and DTL. Question 2. Time that the investment is made Financing method New share issue New debt issue Before the share market learns the true value of the existing assets Scenario 1 Scenario 3 After the share market learns the true value of the existing assets Scenario 2 Scenario 4 Sophie Pharmaceuticals Ltd has 9.6 million ordinary shares on issue. The current market price is $12.50 per share. However, the company manager knows that the results of some recent drug tests have been remarkably encouraging, so that the ‘true’ value of the shares is $13 Unfortunately because of confidential patent issues Sophie Pharmaceuticals cannot yet announce these test results. In addition, Sophie Pharmaceuticals has a property investment opportunity that requires an outlay of $15 million and has a net present value of $2.5 million. At present, Sophie Pharmaceuticals has little spare cash or marketable assets, so if this investment is to be made it will need to be financed from external sources. The existence of this opportunity is not known to outsiders and is not reflected in the current share price. a) Should Sophie Pharmaceuticals make the new investment? b) If so, should the investment be made before or after the share market learns the true value of the company’s existing assets? c) Should the investment be financed by issuing new shares or by issuing new debt? ? Question 3. Previous Years Sales 1400 Retained Earnings 170 Costs 900 Dividends 180 Tax rate 0.3 Assets Liabilities/Equity Current Assets Current Liabilities Cash 460 Creditors 600 Debtors 540 Short Term Notes 100 Inventory 600 Non-Current Assets Non-Current Liabilities PP&E 2000 Debentures 900 Total Assets 3600 Owner’s Equity Retained Profits 1000 Ordinary Shares 1000 3600 Percentage of Sales Approach – Assume all spontaneous variables move as a percentage of sales. a) Given an expected increase in sales of 12%, what is the amount of external funding required? b) To maintain the current debt/equity ratio how much debt and how much equity is required? c) Assuming the company is only operating at 95% capacity, how much new funding (if any) is required? Question 4. Previous Years Sales 1100 Retained Earnings 80 Costs 800 Dividends 130 Tax rate 0.3 Assets Liabilities/Equity Current Assets Current Liabilities Cash 400 Creditors Debtors Short Term Notes Inventory Non-Current Assets Non-Current Liabilities PP&E 600 Debentures 500 Total Assets 1000 Owners’ Equity Retained Profits 500 Ordinary Shares 1000 a) Given an expected increase in sales of 13%, what is the amount of external funding required? b) At this growth rate what is the addition to retained earnings? c) Calculate the Sustainable Growth Rate (SGR) d) At the SGR what external funding is required? e) What would be the growth rate at which no external financing would be required? Question 5. a) A Ltd wishes to maintain a growth ra