The Rentz Corp. is attempting to determine the optimal level
of current assets for the coming year.
Management expects sales to increase to approximately $2 million as a
result of an asset expansion presently being undertaken. Fixed assets total $1 million and the firm
wishes to maintain a 60% debt ratio.
Rentz’s interest cost is currently 8% on both short term and longer term
debt (both of which the firm uses in its permanent capital structure). Three alternatives regarding the projected
current asset level are available to the firm:
1. a tight policy requiring current assets of only 45% of projected
sales 2. Moderate policy of 50% of sales in current assets and 3. A relaxed
policy requiring current assets of 60% sales.
The firm expects to generate earnings before interest and taxes at a
rate of 12% on total sales.
A. What is the expected return on equity under
each current asset level (Assume a 40% effective federal plus state tax rate)
B. In
this problem, we have assumed that the level of expected sales is independent
of current asset policy. Is this a valid assumption?
C. How
would the overall riskiness of the firm vary under each policy?
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.
Read moreEach paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.
Read moreThanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.
Read moreYour email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.
Read moreBy sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.
Read more