FIN 704 Assignment Solution/Question Answers:

1) Answer:
Narrative
Current assets

Tight
2,000,000

Current Assets Policies

Moderate
2,500,000

Relaxed
3,000,000

Tight = 5,000,000 x 40/100

Moderate = 5,000,000 x 50/100
Relaxed = 5,000,000 x 60/100
Fixed assets
Total assets
Debt (40% of total assets)

2,500,000
4,500,000
1,800,000

2,500,000
5,000,000
2,000,000

2,500,000
5,500,000
2,200,000

2,700,000

3,000,000

3,300,000

4,500,000

5,000,000

5,500,000

Tight = 4,500,000 x 40/100

Moderate = 5,000,000 x 40/100
Relaxed = 5,500,000 x 40/100
Equity (60% of total assets)
Tight = 4,500,000 1,800,000
Moderate = 5,000,000 2,000,000
Relaxed = 5,500,000 2,200,000
Total equity and liabilities

2) Answer:
Description
Earnings before interest and tax
EBIT = 5,000,000 x 30/100
(-) Interest on debt
Tight = 1,800,000 x 15/100
Moderate = 2,000,000 x 15/100

Current Assets Policies (Amounts in PKR)

Tight
Moderate
Relaxed
1,500,000
1,500,000
1,500,000
270,000

300,000

330,000

Relaxed = 2,200,000 x 15/100

Before tax Earnings (EBT)
(-) Tax (35% of EBT)

1,230,000
430,500

1,200,000
420,000

1,170,000
409,500

799,500

780,000

760,500

2,700,000

3,000,000

3,300,000

799,500 x 100

780,000 x 100

760,500 x 100

2,700,000

3,000,000

3,300,000

29.61%

26.00%

23.05%

Tight = 1,230,000 x 35/100

Moderate = 1,200,000 x 35/100
Relaxed = 1,170,000 x 35/100
Earnings after interest and tax/NP /
EAIT
(65% of EBT)
Equity (60% of total assets)
Tight = 4,500,000 x 60/100
Moderate = 5,000,000 x 60/100
Relaxed = 5,500,000 x 60/100
(ROE)
ROE = EAIT x 100
Equity

3) Answer:
According to my point of view Model Textile Limited should adopt tight current assets policy
because it shows highest return on equity in calculations among all options which is 29.91%. So
in my point of view in order to maximum return Tight current assets policy is best for (MTL)
because it is highest among other options which are moderate current asset policy which is 26%
and relaxed current assets policy which is 23.05%. Both other options are less than tight current
assets policy so tight current policy is the best among all options.

4) Answer:
Advantages and disadvantages of tight assets policy

Advantages:
There is no blockage of avoidable funds in current assets.
Profitability is high
Disadvantages:
Risk is high
Liquidity is low

Furthermore at the end I would like to say that (MTL) is a risk taker and it main objective is to
gain higher return for its shareholders so according to my analysis company should adopt tight
current assets policy. But there are some important tasks company should do with more
efficiency which are.
For the success of tight current assets policy the sequence of cash transformation should be short
as much it is possible.
(MTL) should be able to gain short term financing so because of these short term financing it
will lower its risks like liquidity etc.