FIN3113 Tutorial 2

Life Fit Pte Ltd

19X3
KK and AY were acquired through by
1. issuing 1.53mil of ordinary shares at $1 par value
2. Converting revenue reserves like retained earnings into capital worth 1.97
mil
Purchased freehold land with an area of 66,000 sq ft
-

Showroom
Warehouse
Office space

Because currently renting its office and warehouse space a private industrial
building.
Also rents other smaller warehouses
Cost of land: $12mil (80% funded by a 4yr loan)
Construction cost: $18mil (construction will begin in first half of 19X4)
*construction loan + existing land loan will be converted into a NEW 4 year term
loan upon completion of building in 19X6/19X7

Acquired 7 shop units for $11.25mil (80% financed by 3 year term loan)
Each unit is leased out monthly total rental is $50,000

KK
-

Once a retail chain

1. Generally consistent with the nature of business except for lands & buildings.
For 19X1 and 19X2, the land & buildings asset value is zero as they rent their
office and warehouse at a private industrial building. However, the value of land
& buildings should be 12mil + 11.25 mil for its land purchase and shop units
acquisition. Renovation cost for 19X3 should also be 18mil.
20x2 20x3 inventory dropped a lot reasonable and consistent coz 20x3
become wholesaler + retailer goods need to move fast
All consistent with the nature except for investment properties

2. Companys cash position generated by issuing new ordinary shares at $1 par

value that amounts up to $1.53 mil. The company also converted their
retained earnings into capital for use. This conversion frees up $1.97 mil of
cash. This two steps taken by the company allows their cash position to rise
by $3.5mil without injection of any cash into the company itself. The cash rich
position is not sustainable as the company cash rich positon is generated
through short term measures. The company cant possibly keep issuing
shares to raise cash as it will dilute the shareholders voting powers and
might result in management conflict of interest. Also, if the company keep
converting retained earnings to cash, the stockholders will not be happy in
the long run as they will not be able to receive any dividends and will cause
the stock price of the company to decrease, hence shaking investors
confidence and cause them to not buy any more shares during issuance of
shares by the company.
3. The copmanys total borrowing/tangible net worth ratio jumped drastically
from 19X1/19X2 to 19X3 as the borrowings of the company increased sharply
due to their various investments that require them to turn to banks to finance
their investments. The bulk of borrowings for the firm arise from the loan for
buying land and for the acquisition of 7 shop units. This rising ratio needs to
be given attention to as it sheds light on the liquidity position of the company.
The ratio tells us what fraction of the borrowings the firm have can be paid
by their tangible assets.
4. The gross profit of Life Fit nearly doubles to around 15k in 19X3. The net
profit of the more than triples that in 19X2. Thus, it can be concluded that it
did perform better than before. Though a lot of operating expenses increased
from the restructuring, the fact that lifefit branched out into retailing has
widened its outreach to their customers, allowing the increase in sales
revenue to more than outweigh the increase in cash outflow due to greater
operating expenses and more salary to be paid for those who manage the
retail shops. If this trend of sales persist into 19X4, then lifefit would do even
better than 19X3 with their already established branding for 1 year.
X2x3 profit margin increase significantly coz become retailer (retailers margin
very high)
5. There might be some financial issues faced by the company in the near
future if sales were to remain stagnant as of 19X3. The company has invested
heavily in their non current assets from the cash they gained from issue
shares and converting retained earnings to cash. If the company was to
continue to use this method to generate their cash position, shareholders will
eventually pull out given that no dividends were given but director was still
renumerated etc.