Landry Corporation is considering what level of current assets to maintain, as well as whether to use more or less long term debt, as opposed to short term debt.

Factors to consider:

Fixed assets - $10,000,000

Earnings before interest and taxes - $ 1,000,000

Tax rate - 25 percent

Optimal capital structure - 60 percent equity, 40 percent debt

Interest on short term debt - 5 percent

Interest on long term debt - 9 percent

Current asset level possibilities.Aggressive - $3,000,000; Conservative - $5,000,000.

Level of short term debt possibilities.Aggressive - 60 percent of total debt; Conservative - 20 percent of total debt.

Required:

a)Determine the return on equity for each plan.

b)Which plan has the most risk? Explain why. Which plan would you recommend?