Question

Assume that Atlas Sporting Goods Inc. has $820,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 13 percent, but with a high-liquidity plan the return will be 10 percent. If the firm goes with a short-term financing plan, the financing costs on the $820,000 will be 7 percent, and with a long-term financing plan, the financing costs on the $820,000 will be 8 percent.

a. Compute the anticipated return after financing costs with the most aggressive asset-financing mix.
  

b. Compute the anticipated return after financing costs with the most conservative asset-financing mix.
  

c. Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix.
  

d. If the firm used the most aggressive asset-financing mix described in part a and had the anticipated return you computed for part a, what would earnings per share be if the tax rate on the anticipated return was 30 percent and there were 20,000 shares outstanding? (Round your answer to 2 decimal places.)
  

e-1. Now assume the most conservative asset-financing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? (Round your answer to 2 decimal places.)
  

e-2. Would the conservative mix have higher or lower earnings per share than the aggressive mix?
  

Answer 1

a.
Aggressive asset financing mix	(820000*13%)-(820000*7%)
Aggressive asset financing mix	$49,200
b.
Conservative asset financing mix	(820000*10%)-(820000*8%)
Conservative asset financing mix	$16,400
c.
In case of two moderate approaches to the asset financing mix, the low liquidity plan for assets would be financed through long term financing plan and high liquidity plan would be financed through short term financing plan
Low liquidity	(820000*13%)-(820000*8%)
Low liquidity	$41,000
High Liquidity	(820000*10%)-(820000*7%)
High Liquidity	$24,600
d.
After tax earnings	49200*(1-0.30)
After tax earnings	$34,440
Earnings per share	34440/20000
Earnings per share	$1.72
e-1.
After tax earnings	16400*(1-0.30)
After tax earnings	11480
Earnings per share	11480/5000
Earnings per share	$2.30
e-2
The earnings per share would be higher then that computed in part (d)