Consider the comprehensive example involving Burlington Resources (Table 16.5). In this example, it was assumed that forecasted sales and expected EBIT, as well as the interest rates on short-term and long-term debt, were independent of the firm's working capital investment and financing policies. However, these assumptions are not always completely realistic in practice. Sales and EBIT are generally a function of the firm's inventory and receivables policies. Both of these policies, in turn, affect the firm's level of investment in working capital. Likewise, the interest rates on short-term and long-term debt are normally a function of the riskiness of the firm's debt as perceived by lenders and, hence, are affected by the firm's working capital investment and financing decisions. Expected EBIT Policy Aggressive Moderate Conservative Forecasted Sales (in Millions of Dollars) $98 99 100 (in Millions of Dollars) $9.8 9.9 10.0 Interest Rate STD LTD (%) (%) 8.9 9.9 7.6 6.3 8.5 7.1 Recompute Burlington's rate of return on common equity under the set of assumptions concerning sales, EBIT, and interest rates for each of the three different working capital investment and financing policies provided in the table above. Round your answers to two decimal places. Expected Rate of Return on Common Equity Aggressive Policy Moderate Conservative % % % Relatively Small Investment in Current Assets; Relatively Large Amount of Short-Term Debt 30 Moderate Investment in Current Assets; Moderate Amount of Short-Term Debt $ 40 30 Relatively Large Investment in Current Assets; Relatively Small Amount of Short-Term Debt $ 45 Current assets (C/A) Fixed assets (F/A) $ 35 Total assets (T/A) $ 65 $ 70 Current liabilities (STD) (C/L) (interest rate, 8%) $ 30 $ 20 Long-term liabilities (LTD) (interest rate, 10%) Total liabilities (60% of T/A) $ 39 22 $ 42 Common equity 26 28 Total liabilities and common equity $ 65 $ 70 Forecasted sales Expected EBIT Less Interest: $100 10 $100 10 STD, 8% LTD, 10% Taxable income Less Taxes (40%) Net income after taxes Expected rate of return on common equity Net working capital position (C/A - C/L) Current ratio (C/A + C/L) g 88 2.4 0.9 $ 6.7 $ 4.0 3|||| 3.3 12 1.6 0.8 2.2 3.8 3.5 $ 6.2 2.7 $ 3.7 2.5 15.4% 13.2% 11.3% $5 $20 $35 1.17 2.0 4.5 45