Question

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 s2 million as a result of an asset expansion presently being undertaken. Fixed assets total $2 million, and the firm plans to maintain a 45% debt-to-assets ratio. Rentz's interest rate is currently 10% 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 salees, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 14 of total sales, and the federal-plus-state tax rate is 40% a. What is the expected return on equity under each current assets level? Round your answers to two decimal places Restricted policy Moderate pollcy Relaxed policy b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption? I. Yes, sales are controlled only by the degree of marketing effort the firm uses, Irrespective of the current asset policles it employs II. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm III. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets IV No, this assumption wauld probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales v Yes, this assumption would probably be val id in a real world situation. A firm's current asset policies have no significant effect on sales. -Selecs

Answer 1

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WORKING CAPITAL APPROACH - Microsoft Excel (Product Activation Failed) Review View Add-Ins File Home Insert Page Layout Formulas Data - 2x % Cut Σ AutoSum : A Wrap Text Merge & Center - General $ - % , Number 8... Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format 2 Clear Sort & Filter Editing Find & Select Cells BC BD BE BE BH BJ ВК BI 45% 184 55% BG 100% TOTAL ASSETS 2900000 DEBT Calibri -11AA = = = Dr E Copy Paste Format Painter BI U D A E TEE Clipboard Font Alignment BK196 AW AX AY AZ BA BB SALES 2000000 185 CURRENT ASSETS 186 RESTRICTED POLICY 900000 187 45% OF SALES 188 MODERATE POLICY 1000000 189 50% OF SALES 190 RELAXED POLICY 1200000 60% OF SALES 192 193 EBIT % of sales = 14% EQUITY FIXED ASSETS 2000000 1305000 1595000 2000000 3000000 1350000 1650000 2000000 3200000 1440000 1760000 191 rate of interest = 10% 194 195 196 197 198 199 200 201 202 EBIT INTEREST EBT TAX (40%) NET INCOME RETURN ON EQUITY RESTRICTED 280000 130500 149500 59800 89700 5.62% MODERATE 280000 135000 145000 58000 87000 5.27% RELAXED 280000 144000 (10% ON DEBT) 136000 54400 81600 4.64% [NET INCOME/EQUITY] Z SCORE insu pv fv Sheet1 Sheet2 ferences cash opti LINE OF CREDIT eoq_miller CARD BANKER ACCEPTANC FACTOR SI DISC FOCAL WC REQUIRE Sheet3 | |BOJ 130% T | + Rea 0 6. B 9 . * * ENG 29-10-2019

WORKING CAPITAL APPROACH - Microsoft Excel (Product Activation Failed) Review View Add-Ins File Home Insert Page Layout Formulas Data - 2x % Cut Σ AutoSum : A Dr General Wrap Text Merge & Center 8. Fill Clear $ - % Number Calibri -11AA = = = E Copy Paste Format Painter BI U. 3 A * Clipboard Font AW292 for | AW AX AY AZ BA Formatting as Table Styles Styles Sort & Filter Editing Find & Select Alignment Cells BB BC BD BE BF BG BH BI BJ BK A 274 iV N O, THIS ASSUMPTION IS NOT VALID AS CURRENT ASSET POLICIES DO HAVE SIGNIFICANT EFFECT ON SALES 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 Z SCORE insu pv fr cash opti LINE OF CREDIT og_miller CARD BANKER ACCEPTANC FACTOR SI DISC FOCAL WC REQUIRE Sheet1 Sheet2 ferences Sheet30 I I |BOJ 130% Rea 0 + ELEB * OENG 29-10-2019