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4. Reynolds Equipment Company is investigating the use of various combinations of short-term and long-term debt in financing its assets. Assume that the company has
4. Reynolds Equipment Company is investigating the use of various combinations of short-term and long-term debt in financing its assets. Assume that the company has decided to employ $30 million in current assets, along with $35 million in fixed assets, in its operations next year. Given this level of current assets, anticipated sales and EBIT for next year are $60 million and $6 million, respectively. The company's income tax rate is 40 percent. Stockholders' equity will be used to finance $40 million of its assets, with the remainder being financed by short-term and long-term debt. Reynolds is considering implementing one of the following financing policies: a. Determine the following for each of the financing policies: a.1 Expected rate of return on stockholders' equity a.2 Net working capital position a.3Current ratio b. Evaluate the profitability versus risk trade-offs of these three policies
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