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Case Analysis

The document contains guide questions and answers about Zapatoes Inc's capital structure, profitability, and factors to consider for long or short-term financing. For question 1, the capital structure had a higher debt-to-equity ratio in 2014 than 2015, indicating better solvency. Additional debt could be positive if debt levels are manageable, while additional equity allows for growth. Question 2 discusses how debt can boost profits if managed well but introduces risk, while equity has no repayment obligation. Question 3 lists risk, financing costs, financial resources, and repayment ability as factors in choosing long vs short-term financing. Question 4 recommends Anthony take long-term financing as sales are increasing and the company has a healthier solvency

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6K views

Case Analysis

The document contains guide questions and answers about Zapatoes Inc's capital structure, profitability, and factors to consider for long or short-term financing. For question 1, the capital structure had a higher debt-to-equity ratio in 2014 than 2015, indicating better solvency. Additional debt could be positive if debt levels are manageable, while additional equity allows for growth. Question 2 discusses how debt can boost profits if managed well but introduces risk, while equity has no repayment obligation. Question 3 lists risk, financing costs, financial resources, and repayment ability as factors in choosing long vs short-term financing. Question 4 recommends Anthony take long-term financing as sales are increasing and the company has a healthier solvency

Uploaded by

Joshua Adorco
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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GUIDE QUESTIONS

1. What is the Zapatoes Inc’s capital structure? What is the effect of an additional
debt? Additional equity?

Answer:

The Zapatoes Inc’s capital structure has the capability to pay its long-term
debts since the debt-to-equity ratio in the 2014 which is 0.92 is greater than the
year 2015 which is 0.63. This indicates that in year 2015, the Zapatoes Inc. had a
healthy solvency position.

The effect of the additional debt might be negative or positive, because if the
company’s debt was too high and the company already don’t have enough money to
pay it’s currently maturing obligation they might fall into loss. But on other side if
the company had enough resources to pay it’s debt there’s nothing to worry about.
About the additional equity this is a good thing because the effect of this event can
reflect to the capacity of the company to make grow and create more source of
income.

Note: Solution for the debt-to-equity ratio

Total Liabilities / Total Shareholder’s Equity:

2014 4,200,000 / 4,410,000 = 0.92

2015 4,400,000 / 6,980,000 = 0.63

2. Assess the profitability of Zapatoes Inc’s. What is the effect of issuing debt to its
profitability? Effect of equity?

Answer:

The effect of this event is either good or bad. It is good when the one who
assess the operation had a good technique of managing the company, if the
company had a very nice performance issuing debt can be a good opportunity to
make and create more growth, the progress of the . And about the effect of the
equity
3. What factors are considered in deciding whether to take long-term or short-term
financing?

Answer:

One of the factors that the company should consider in deciding whether to take
long-term or short-term financing is the risk that might positively or negatively
affect the company. Another one is the cost of the amount needed to finance a
certain project. This is needed to be consider because a company should only
borrow the amount that they need so that it will be easier for them to pay their
debts. In addition to this, a company should also consider their financial resources
and its capability to borrow money. If a company does not have the capability to
immediately pay its debts, then that company should be wise enough to choose the
long-term financing because short-term financing often comes with a high monthly
payment unlike in the long-term financing. However, in the long-term debt, there
will be also a fixed maturity date that will obliged a company to ensure that they will
pay their debt on or before the deadline and since it is a long-term, there will be a
great interest that the company needs to pay to its stock holders whether it will
earn a profit or not.

4. What financing should Anthony Cruz take?


Answer:

Anthony Cruz should take the long-term financing. Although it requires


a high monthly payment for 5 years because of its interest, it can be still pay
by Anthony since his company has annually increased in its sales. It might be
hard for Anthony to fulfill the payment for his project but it will be better for
the company to take the long-term financing rather than the short-term and
the offer of his friend. Long-term financing will be appropriate for Anthony to
take since he is confident that the volume of sales of the company will
increased for the next five years. Anthony might feel unsure of this because
he will open a new production facility, but he should just think that the said
facility will be a great help for the company to earn even more than before.
In addition, the use of long-term financing the opening of the said facility is a
great idea since the company’s level of profit is increasing every year.

Note: Solution for the debt-to-equity ratio

Total Liabilities / Total Shareholder’s Equity

2014 2015

4,200,000 / 4,410,000 = 0.92 4,400,000 / 6,980,000 = 0.63

This is one of the proof that Anthony should take long-term financing
since its company has a healthier solvency position which indicates that it has
the capability to pay long-term debts.

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