(please note that data is different from the question thats already solved on chegg).

Bam 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 - $6,000,000

Earnings before interest and taxes - $600,000

Tax rate 20 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 - $2,000,000; Conservative - $3,000,000.

Level of short-term debt possibilities. Aggressive 60 percent of total debt. Conservative 30 percent of total debt.

Required:

a) Calculate the return on equity for the aggressive and conservative plans.

b) Discuss which plan you would choose.