In: Finance
CURRENT ASSETS INVESTMENT POLICY
Rentz Corporation is investigating the optimal level of current
assets for the...
CURRENT ASSETS INVESTMENT POLICY
Rentz Corporation is investigating the optimal level of current
assets for the coming year. Management expects sales to increase to
approximately $3 million as a result of an asset expansion
presently being undertaken. Fixed assets total $2 million, and the
firm plans to maintain a 60% debt-to-assets ratio. Rentz's interest
rate is currently 8% on both short-term 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 projected sales, (2) a moderate policy where current
assets would be 50% of sales, and (3) a relaxed policy where
current assets would be 60% of sales. Earnings before interest and
taxes should be 11% of total sales, and the federal-plus-state tax
rate is 40%.
- 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 |
|
% |
- In this problem, we assume that expected sales are
independent of the current assets investment policy. Is this a
valid assumption?
- Yes, the current asset policies followed by the firm mainly
influence the level of fixed assets.
- 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.
- Yes, this assumption would probably be valid in a real world
situation. A firm's current asset policies have no significant
effect on sales.
- Yes, sales are controlled only by the degree of marketing
effort the firm uses, irrespective of the current asset policies it
employs.
- Yes, the current asset policies followed by the firm mainly
influence the level of long-term debt used by the firm.
-Select- Item
- How would the firm's risk be affected by the different
policies?
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