Warne Enterprises decides to expand its operations by applying for an additional loan of$600 000.
Warne Enterprises decides to expand its operations by applying for an additional loan of$600 000. As a result, revenue from ordinary activities is expected to increase by $30 000.Financial data (assume average balances) before and after expansion include:Before expansionTotal assets (average)Total liabilitiesAverage shareholders’ equityRevenue from ordinary activitiesInterest expenseProfit before income taxIncome tax expenses (30 per cent)ProfitAfter expansion$3 000 000$3 600 000800 0002 200 000800 00060 000740 000222 000$518 0001 400 0002 100 000830 00080 000750 000225 000525 000RequiredCalculate the following:Beforea ROA ratiob Return on ordinary shareholders’ ratioAfterWould shareholders be happy with the expansion plans?E8.19Examine what happens to the gross profit margin when:a.advertising is incurred.b.selling prices are increased assuming customers buy the same amount.c.suppliers increase their prices.E8.24Zhang Company’s financial records reveal the following at 30 June 2016.Net sales$225 000Cost of sales$94 000Ending inventory$37 000Beginning inventorya.$22 000Assuming a 365-day year, calculate the days inventory ratio. Interpret and explain thisratio.b. Zhang Company proposes to improve control of inventory and to reduce days inventorylevels by five days. If this is achieved, calculate how many times inventory would beturned over per annum. Estimate by how much the average inventory would need to bereduced.E8.25 (b & c)Rejected Ltd reports the following information:$’000Total assetsProfit after tax1 92065Current liabilities570Non-current liabilities830$’000Interest revenue110Interest expense160Tax expense45Current assets = 50% of totalassetsFrom this information, calculate and interpret the following ratios (year-end figures willhave to be used because the comparative year figures are not available) and prepare areport on the financial position and performance of Rejected Ltd:b.return on equityc.return on assets using:i.profitii.iii.EBIT
