In: Finance
The Calgary Company is attempting to establish a current assets policy. Fixed assets are
$600,000, and the firm plans to maintain a 40 percent debt-to-assets ratio. Calgary has no operating current liabilities. The interest rate is 12 percent on all debt. Three alternative current asset policies are under consideration: 40, 50, and 60 percent of projected sales. The company expects to earn 18 percent before interest and taxes on sales of $6 million. Calgary’s effective tax rate is 40 percent.
Best Option is if Current Assets are 40% of the Projeted Sales because it is giving us the Highest ROE i.e. 31.2%
Current Asset Policy is Important because they are expected to be sold next year, and if its less, it helps to convert early in cash