Armin Joel Dimalibot Christine Joyce Natividad

Jian May Foster Rafael Carlos Silvestre

CASE STUDY - GUSLITS & GRUNWALD CASE

Computation:
NEW PRODUCT CURRENT AFTER NEW
LINE PRODUCT LINE PRODUCT LINE

Net Sales 2,800,000 12,000,000 14,800,000

Cost of Sales (1,600,000) (7,500,000) (9,100,000)

Operating Expense (200,000) (1,800,000) (2,000,000)

Interest (100,000) (100,000)

Income 1,000,000 2,600,000 3,600,000

Tax (400,000) (1,040,000) (1,440,000)

Cost After Tax (150,000)

Net Income 600,000 1,560,000 2,010,000

NEW PRODUCT CURRENT AFTER NEW

LINE PRODUCT LINE PRODUCT LINE

Depreciation 150,000 400,000 550,000

Total Cash Inflow 750,000 1,960,000 2,560,000

Return in Asset 20% 20% 20%

Total Assets 12,000,000 15,000,000

Equipment needed 3,000,000

Current Liability 3,000,000 3,000,000

Long Term Debt 3,000,000 1,000,000 4,000,000

Total Liability 3,000,000 4,000,000 7,000,000

Equity 8,000,000 8.000

Total Liabi & Equity 3,000,000 12,000,000 15,000,000

REQUIREMENTS:

1. What impacts will the new product line have on profit measures and cash flows?

Cash inflows going to follow the implementation of the new line of products would be
$2,340,000.00, up from $1,800,000.00 the year before. The implementation of the new line of
products will result in a total profit of $2,010,000, compared to a net profit of $1,560,000.00 last
year.

2. Examine and comment on Guslits’ strategy to finance the investment. Is it likely

that shareholders will be impressed with the investment? Why?

CURRENT PRODUCT LINE AFTER NEW PRODUCT

LINE

Total Liability 8,000,000 8,000,000

Equity 12,000,000 15,000,000

Debt to Equity 50% 87.50%

Net Income 1,560,000 2,010,000

Total Cash Inflow 1,960,000 2,560,000

Guslits decided on debt financing instead of issuing stock or making an equity investment to
fund the company's new product line. By opting to issue long-term debt to fund the new line, the
company's debt-to-equity ratio will rise to 87.5 percent, up from 50 percent last year before the
new line, putting them in a highly leveraged position and potentially exposing them to a default
in the worst-case situation. The benefit, nevertheless, exceeds the expense of paying the interest.
The shareholders will be impressed by the new investment since both the net profit and cash
inflows have improved dramatically.

3. In your opinion, is the investment attractive? Explain your answer.

CURRENT PRODUCT LINE AFTER NEW PRODUCT

LINE

Debt Ratio 0.33 0.47

Net Profit Margin Ratio 13% 14%

All in all, the new funding is still enticing because it's much more fruitful, regardless of the fact
that it has become more able to leverage. Although it is a significant financial investment, the
debt ratio still seems to be manageable, indicating that a company seems to have at least once or
twice quite so many assets as liabilities. Provided that this proportion would include tax payment
in addition to all other expenditures, the profitability ratio increased by 1%, implying that the
business will do very well following the introduction of the proposed new product line.