Question
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
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.
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