8/9/2019 Obaho 2015 New

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Management Consultancy

FINANCIAL ASPECT PREPARATION

Problem I. Mr. Banana Obaho has approached you to determine the feasibility of manufacturingProduct BO that would be sold at P250 per unit. It was determined that the fied assets !PP"# costingP$%500%000 would be able to produce $00%000 units annually !practical capacity#. Incidental epensesfor freight% insurance and customs duties paid on imported e&uipment amounted to P'00%000. (nnualfied costs and epenses are estimated at P2%$00%000. )actory o*erhead is +0, of annual costs.-he estimated economic life of the fied assets is 5 years with the amount of depreciation already partof the annual fied costs.

-he following are the components of the unit *ariable cost for Product BO/irect materials P 0.00/irect labor 10.00)actory o*erhead*ariable 50.00

-he *ariable operating epenses per unit is estimated at P'0.(nnual sales estimates are as follows

3olume ProbabilityOptimistic $00%000 '0,

Most li4ely +0%000 0

Pessimistic '0%000 $0

Income ta rate is '0, while minimum desired rate of return is 20,. Preoperating epensesare estimated at P$%+5%+50. (ll sales and purchases are assumed to be on credit. Managementwould want to use the )I)O in*entory system.

(s part of the financial goals% Mr. Obaho has set the following financial assumptions based ona '00wor4ing day year

(nnual Cash -urno*er .. $5 times(ccounts 6ecei*able -urno*er.. 20 times(*erage (ge of )inished 7oods . 20 days6aw Materials In*entory -urno*er .. 20 times

8o. of days9 purchases in (ccounts Payable '0 days

Mr. Obaho intended to organi:e a corporation to be named Banana One Corp. !B.O. Corp.#and finance it by issuing '0%000 ordinary shares of stoc4 at P$00 par and by obtaining a 20, simpleinterest% 1year loan for any deficiency !in multiples of P$00%000# with uniform payments due at theend of each year. Mar4et price of capital stoc4 is epected to increase to P$25 per share at the endof the fi*eyear period. Mr. Obaho also desired to use as component percentages the corporation9sinitial capital structure in computing for the cost of capital. (ssume no cash di*idends.

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