Question
Q.4 Marconi Company currently has total assets of $10 million, of which current assets comprise $2.2 million. Sales are $10 million annually, and the before-tax
Q.4 Marconi Company currently has total assets of $10 million, of which current assets comprise $2.2 million. Sales are $10 million annually, and the before-tax net profit margin is 13% percent. The firm currently does not have interest-bearing debt. Given renewed fears of potential cash insolvency, an overly strict credit policy, and imminent stock outs, the company is considering higher levels of current assets as a buffer against adversity. Specifically, levels of $2.8 million and $3.2 million are being considered instead of the $2.2 million presently held. Any additions to current assets would be financed with new equity capital. Required: (a)Determine the total asset turnover, before-tax return on investment, and before-tax net profit margin under the three alternative levels of current assets. (b)If the new additions to current assets were financed with long-term debt at 15 percent interest, what would be the before-tax interest cost of the two new policies?
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