Problem 6-10 Optimal policy mix [LO6-5]

Assume that Hogan Surgical Instruments Co. has $3,800,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 16 percent, but with a high-liquidity plan, the return will be 12 percent. If the firm goes with a short-term financing plan, the financing costs on the $3,800,000 will be 8 percent, and with a long-term financing plan, the financing costs on the $3,800,000 will be 10 percent.

a. Compute the anticipated return after financing costs with the most aggressive asset-financing mix.

____ Anticipated Return

b. Compute the anticipated return after financing costs with the most conservative asset-financing mix.

_____ Anticipated return

c. Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix.

Low Liquidity ____

High Liquidity ____