Question
Your company wants to establish its current assets policy. Fixed assets are $ 1 million, the company has no operating current liabilities. Earnings are expected
Your company wants to establish its current assets policy. Fixed assets are $ 1 million, the company has no operating current liabilities. Earnings are expected to be 12% before interest and taxes, on sales of $ 2 million. The marginal tax rate is 30%, the interest rate is 8% on all debt and a 0.40 leverage ratio should be maintained.
Three alternatives regarding the projected current asset level are available:
- An aggressive policy, requiring current assets of only 40% of projected sales
- A moderate policy of 50% of sales in current assets
- A conservative policy, requiring current assets of 60% of sales.
Questions:
- 1) What is the expected return on equity under each asset policy?
- 2) Explain how would the overall riskiness of the company differ under each policy?
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Intermediate Accounting
Authors: Kin Lo, George Fisher
Volume 1, 1st Edition
132612119, 978-0132612111
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