Atlas Corporation wants to determine the optimal level of current assets that should be kept in the next year. The company is currently undergoing expansion, after which sales are expected to increase approximately by PKR 1 million. The company wants to maintain a 40% equity ratio and its total fixed assets are of PKR 1 million. Atlas’s interest rate is currently 8% on both short-term and longer-term debt (which the firm uses in its permanent structure). The company must choose between three strategies and decide which one is better.
(1) a lean and mean policy where current assets would be only 35% of projected sales, (2) a moderate policy where current assets would be 40% of sales, and (3) a lenient policy where current assets would be 50% of sales. Earnings before interest and taxes should be 10% of total sales, and the federal-plus-state tax rate is 35%.
What is the expected return on equity under each current asset level?
In this problem, we assume that expected sales are independent of the current asset policy. Is this a valid assumption? Why or why not?
How would the firm’s risk be affected by the different policies?
A good current and quick ratio are a guarantee of excellent working capital management strategies. Is this a valid assumption? Why or why not?
Excerpt taken and modified from Government of Pakistan Investment bond’s Auction result:
Auction for 3, 5, 10- and 20-year Pakistan Investment Bonds was held on March 20, 2019 with settlement date on March 21, 2019. The coupon rates for 3, 5, 10- and 20-year bonds are 7.25%, 8.00%, 8.75%, and 10.75% respectively. The accepted bid summary and result is as under:
Using weighted average yield % p.a calculate the following rates:
The 2-year rate 3 years from now
The 5-year rate 5 years from now
Given the following information what do you think will be the shape of the Pakistan investment bond yield curve. Explain support your answer with the help of the latest SBP Monetary policy report