Problem $16-13$

Current Asset Usage Policy

a$.$ What is the expected return on equity under each current asset level? Round your answers to two decimal places.

Tight policy

$\%$

Moderate policy

Relaxed policy

$10\mathrm{.}4$

$\%$

$\%$

b$.$ In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption?

I. Sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs.

II$.$ The current asset policies followed by the firm mainly influence the level of long$-$term debt used by the firm.

III. The current asset policies followed by the firm mainly influence the level of fixed assets.

IV$.$ 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.

V$.$ Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales.

Why or why not?

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

c$.$ How would the overall risk of the firm vary under each policy?

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

The assumption that the level of expected sales is

independent of current asset policy is not valid. Tighter

current asset policies may lead to lower sales if the firm

is unable to meet customer demand promptly or if it