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A construction firm has the following abridged balance sheet, GBP `000,000 BP `0G00,000 Assets...

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Accounting

A construction firm has the following abridged balance sheet,

GBP `000,000 BP `0G00,000

Assets

Net fixed assets 70

Cash and Current assets 30

Total assets 100

Financed By

7% Debentures 30

Equity capital ` 60

Current liabilities 10

Total capital 100

Its fixed assets are expected to provide a 15% return over the planned investment horizon.

This firm intends to embark on projects that require an initial sinking of 30million and are expected to provide in aggregate a 20% return with a standard deviation of 30% over the planned investment horizon.

These projects are to be financed wholly by the internally available funds and the debentures are to be redeemed at the end of the planned investment horizon.

  1. Evaluate, stating your assumptions, the probability that the firm is financially better off by embarking on the intended projects;
  2. .Assuming that it is only able to earn actual returns of 12% on its fixed assets and 15% on its projects, derive the projected balance sheet at the end of the planned investment horizon;

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