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Rentz Corporation is invostigating the optimal level of current assets for the coming year, Mansgement expects sales to increase to approximately 54 million as a

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Rentz Corporation is invostigating the optimal level of current assets for the coming year, Mansgement expects sales to increase to approximately 54 million as a result of an asset exponsion presently boing undertaken. Fixed assets total 51 million, and the firm plans to maintain a 45% debt-to-assets ratio. Rentz's interest rate is currentiy 10% on both shortterm and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of prejected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current asset's would be 60% of sales. Eamings before interest and taxes should be 13% of total sales, and the federal-plus-state tax rate is 25%. a. What is the expected return on equity under each current assets level? Round your answers to two decimal places. Restricted policy: Moderate policy: Relaxed policy: b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption? 1. Yes, this asgumption would probably be valid in a real-world stuotios. A firm's current asset pollieles have no significant effect on sales. 11. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs. III. Yes, the curtent asset policies followed by the firm mainly infuence the level of long-term debt used by the firm. IN. Yes, the current asset policies followed by the firm mainly influence the level of fored assets. V. No, this assumption would probably not be valid in a real-worid situation. A firm's current asset policles may have a significast effect on sales

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