Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

CURRENT ASSETS INVESTMENT POLICY Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately

image text in transcribed

CURRENT ASSETS INVESTMENT POLICY Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total $3 million, and the firm plans to maintain a 50% debt-to-assets ratio. Rentz's interest rate is currently 10% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 10% of total sales, and the federal-plus-state tax rate is 40%. a. What is the expected return on equity under each current assets level? Round your answers to two decimal places. % Restricted policy Moderate policy Relaxed policy % % b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption? I. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm. II. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets. III. No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales. IV. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales. V. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs. -Select

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Basic Finance An Introduction To Financial Institutions, Investments And Management

Authors: Herbert B Mayo

9th Edition

0324322291, 9780324322293

More Books

Students also viewed these Finance questions

Question

6. Explain what causes unsafe acts.

Answered: 1 week ago