Changing Levels of Current Assets

Firm A had the following levels of assets and liabilities:

Assets Liabilities

Current Assets $5,000 Current Liabilities $3,000

Fixed Assets 12,000 Long-term Debt 6,000

Total 17,000 Total Debt 9,000

The company annually earns approximately 4% on its current assets and 14% on its fixed assets.

Calculate the firms initial values of 1) the ratio of current-to-total assets, 2) annual profits on total assets, and 3) net working capital.

If the firm shifts $2,000 of current assets to fixed assets, calculate the values of 1) the ratio of current-to-total assets, 2) annual profits on total assets, and 3) net working capital.

Returning to the original balance sheet, assume the firm shifts $2,000 of fixed assets to current assets. Find the values of 1) the ratio of current-to-total assets, 2) annual profits on total assets, and 3) net working capital.

Summarize your findings by describing the relationship between risk and return and the three different asset structures found in a, b, and c.