St.

Columban’s Institute
Domalandan Center, Lingayen, Pangasinan
S.Y. 2019-2020

CASE
ANALYSIS

Submitted by:
Jhassel Joy N. Legayo

Submitted to:
Mr. Ronaldo C. Manaoat

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 Case Background
Anthony Cruz whoowns the Zapatoes Inc. wants to expand his
operations by opening his first production facility. However, he needs Php10
million to finance the expansion. The problem is where he will get the funds
needed and he has three options:
1. Accept a Php10million-equity investment from his friend Alex but he
will holds 45% ownership of the business afterwards. He does not
demand any specific return.
2. Short-term loan for 1 year for Php10 million at 6% per annum from
Shortime Bank.
3. Long-term loan for 5 years for Php10 million at 10% per annum from
Longly Bank.
He is confident that his sales volume will grow for the next 5 years but
it is tainted by his uncertainties over the possible effects for the opening of
his new production facility. What must he do?

Analysis/Computations
Profitability Ratio
 For the year 2013
o Return on Equity = (Net Income / Stockholder’s Equity) * 100%
= (717 490.20 / 3 170 000) * 100%
= (0.226337) * 100%
= 22.63%
o Return on Assets = (Operating Income / Total Assets) * 100%
= (1 024 986 / 6 170 000) * 100%
= (0.166109) * 100%
= 16.61%
o Gross Profit Margin = (Gross Profit / Sales) * 100%
= (3 124 986 / 5 040 300) * 100%
= (0.62) * 100%
= 62%
o Operating Profit Margin = (Operating Profit / Sales) * 100%
= (1024 986 / 5 040 300) * 100%
= (0.203358) * 100%
= 20.34%

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 o Net Profit Margin = (Net Profit / Sales) * 100%
= (717 490.20 / 5 040 300) * 100%
= (0.142350) * 100%
= 14.24%

 For the year 2014

o Return on Equity = (Net Income / Stockholder’s Equity) * 100%
= (1 240 000 / 4 410 000) * 100%
= (0.281179) * 100%
= 28.12%
o Return on Assets = (Operating Income / Total Assets) * 100%
= (2 019 428.57 / 8 610 000) * 100%
= (0.234544) * 100%
= 23.45%
o Gross Profit Margin = (Gross Profit / Sales) * 100%
= (4 319 428.57 /6 856 235.83) * 100%
= (0.629999) * 100%
= 63%
o Operating Profit Margin = (Operating Profit / Sales) * 100%
= (2 019 428.57 / 6 856 235.83) *
100%
= (0.294538) * 100%
= 29.45%
o Net Profit Margin = (Net Profit / Sales) * 100%
= (1 240 000 / 6 856 235.83) * 100%
= (0.180857) * 100%
= 18.09%
 For the year 2015
o Return on Equity = (Net Income / Stockholder’s Equity) * 100%
= (2 570 000 / 6 980 000) * 100%
= (0.368194) * 100%
= 36.82%
o Return on Assets = (Operating Income / Total Assets) * 100%
= (3 919 428.57/ 11 380 000) * 100%
= (0.344413) * 100%
= 34.44%
o Gross Profit Margin = (Gross Profit / Sales) * 100%
= (6 269 428.57/ 9 219 747.90) * 100%
= (0.679999) * 100%
= 68%

o Operating Profit Margin = (Operating Profit / Sales) * 100%

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 = (3 919 428.57 / 9 219 747.90) *
100%
= (0.425112) * 100%
= 42.51%
o Net Profit Margin = (Net Profit / Sales) * 100%
= (2 570 00 / 9 219 747.90) * 100%
= (0.278749) * 100%
= 27.87%

Recommendations
Based from the computed ROE from the year 2013-2015, for every
Php1.00 of stockholder’s equity, 22.63 centavos (2013), 28.12 centavos
(2014), and 36.82 centavos (2015) was earned through that years. We also
observed that from the past three years the ratios increased meaning that
the generated profits is also increasing as well as the stockholder’s equity. In
other words, the company is more successful in generating profit internally.
Next is the ROA, which is for every Php1.00 asset in the company,
16.61 centavos (2013), 23.45 centavos (2014), and 34.44 centavos (2015)
was generated through the years. The ratios increased which means that a
business is more profitable and efficient for the past three years.
Additionally, the ratios are greater than the borrowing rate mentioned for the
short-term and long-term loan.Therefore, from that, the management may
consider borrowing to finance expansion.
From the computed gross profit margin, which means that for every
Php1.00 of sale the company generates, it earned 62 centavos (2013), 63
centavos (2014), and 68 centavos (2014) in gross profit. The ratios increased
like the ROA and ROE meaning that the company uses its materials and labor
to produce and sell products profitably.
Then the computed Operating Profit Margin, which defines that out of
Php1.00 sales, or revenue that Zapatoes Inc. generated, the company
earned 20.34 centavos (2013), 29.45 centavos (2014), and 42.51 centavos
(2015) after deducting cost of sales and operating expenses. Again, the
ratios increased defining that the earnings that the business generates from
its operating activities also increased.
Last but not the least is Net Profit Margin meaning that for every
Php1.00 of revenues generated, Zapatoes Inc. earned 14.24 centavos
(2013), 18.09 centavos (2014), and27.87 centavos (2015). The ratios
observingly increasing and it means that so far the company is doing better
in turning sales into profit.
Moreover, to our conclusion, Zapatoes Inc. is performing well in
generating profits but he cannot afford to pay the Php10 million debt in 1
year from Shortime Bank. In addition, if he also cannot consider his friend’s
Alex offer because he will share 45% of the company and it means that the

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 profit he will generate will no longer be for him only. So we recommend that
Anthony should accept the long-term loan because from the three years, he
can pay his debt of Php10 million for 5 years even if it also has interest.

Guide Questions:
1. What is the Zapatoes Inc’s capital structure? What is the effect of an
additional debt?
Additional equity?
- Zapatos inc's capital source on the Filipino shoe company. The effect of
additional debt allows companies to leverage existing funds thereby enabling
more rapid expansion than would otherwise be possible additional Equity
effects financing dilutes existing shareholders.

2. Assess the profitability of Zapatoes Inc’s. What is the effect of issuing debt
to its profitability?
Effect of equity?
- Debt capital can also have a positive effect on profitability. Debt allows
companies to leverage existing funds, thereby enabling more rapid
expansion than would otherwise be possible. The effective use of debt
financing results in an increase in revenue that exceeds the expense of
interest payments.Increases in equity from a company's earnings activities
are one part of the equation, as are decreases in equity due to expenditures.
But a company's value can also increase or decrease because of transactions
and events that are neither linear nor measurable

3. What factors are considered in deciding whether to take long-term or

short-term financing?
- The short term decisions are important for a business enterprise because
they affect the liquidity and profits earned in the short run

4. What financing should Anthony Cruz take?

Anthony Cruz should take a short time because smaller amounts while long-
term financing are larger amounts. Short-term is for smaller amounts, you
pay them back more quickly at a higher interest rate and there's a shorter
approval process

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