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Zapatoes, Inc
Anthony Cruz owns Zapatoes, Inc., a home-grown Filipino shoe company. His company has experienced
tremendous growth since it has started its operations in 2009. With a growing demand for his products,
Anthony Cruz is considering expanding his operations by opening his first production facility.
Currently, he pays another company to manufacture the shoes he designs. He is contemplating to
produce the shoes Zapatoes, Inc. facility, with the hope of lowering the cost of production.
The company needs PHP10 million to finance this expansion and is at a tight cash position. Anthony Cruz
is now wondering where to get the funds needed – invite an investor or personally borrow from a bank?
Here are the comparative financial statements of Zapatoes, Inc.
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Zapatoes, Inc. sold 3,300 pairs on 2013, 4,500 pairs on 2014, and 6,200 pairs in 2015. With the brand’s
target market – young professionals and college students, it can only sell it at the PHP1,000 to PHP2,000
price range per pair.
Anthony is wondering whether owning his own manufacturing facility can really improve its profitability.
Currently, he is producing his shoes at PHP475 pesos per pair. He expects that he can lower
production costs to as much as PHP300 per pair if he will manufacture it himself. However, opening a
new production facility will increase operating expenses (including depreciation) by 30%. Currently,
most of his operating expenses are marketing and distribution costs.
To finance the PHP10 million facility, he has three options:
• Accept a PHP10 million equity investment from his friend, Alex. Alex will hold 45% percent ownership
of the business afterwards. Alex does not demand any specific return.
• Short-term loan for 1 year for PHP10 million at 6% per annum from Shortime Bank.
• Long-term loan for 5 years for PHP10 million at 10% per annum from Longly Bank.
Anthony is very confident that his sales volume will still grow for the next 5 years. However, his confidence
is tainted by his uncertainties over the impact of opening a new production facility. What must he do?

1.) What is the Zapatoes Income's capital structure?

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2.) What is the effect of an additional debt?

3.) Assess the profitability of Zapatoes

4.) What is the effect of acquiring additional Debt?

5.) What factors are considered in deciding whether to take long-term or short-term financing?

6.) What financing should Anthony Cruz take? (Recommendations)

The following formula will help for analysis:

1.) Return on Equity = (Net Income / Stockholder’s Equity)
2.) Return on Assets = (Operating Income / Total Assets)
3.) Gross Profit Margin = (Gross Profit / Sales)
4.) Operating Profit Margin = (Operating Profit / Sales)
5.) Net Profit Margin = (Net Profit / Sales)