Question

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 $3 million, and the firm plans to maintain a 45% debt-to-assets ratio. Rentz's interest rate is currently 9% 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 13% of total sales, and the federal-plus-state tax rate is 40%.

1. 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		___%

2. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption? Choose one.
   1. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs.
   2. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm.
   3. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets.
   4. 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.
   5. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales.

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 Calibri 11 Dr AA = = = A E Copy Paste Format Painter Clipboard B I U - D SF Wrap Text General Merge Merge & Center Center $ - % % CD Number 4:0 .00 8.9 Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear Sort & Filter Editing Find & Select Font Alignment Cells AW255 AW AX SALES AY 3000000 A Z BA BB BC BD BE BF BH BJ BL BM A 255 256 257 258 259 BG 100% TOTAL ASSETS 4350000 BI 45% DEBT 1957500 B K 55% EQUITY 2392500 FIXED ASSETS 3000000 RESTRICTED POLICY MODERATE POLICY CURRENT ASSETS 1350000 45% OF SALES 1500000 50% OF SALES 1800000 60% OF SALES 3000000 4500000 2025000 2475000 260 RELAXED POLICY 3000000 4800000 2160000 2640000 EBIT % of sales = rate of interest = 9% 13% 390000 261 262 263 264 265 266 267 268 269 270 271 272 273 274 275 ™ Rea EBIT INTEREST EBT TAX (40%) NET INCOME RETURN ON EQUITY RESTRICTED 390000 176175 213825 85530 128295 5.36% MODERATE 390000 182250 207750 83100 124650 5.04% RELAXED 390000 194400 (9% ON DEBT) 195600 78240 117360 4.45% [NET INCOME/EQUITY] NO, THIS ASSUMPTION IS NOT VALID AS CURRENT ASSET POLICIES DO HAVE SIGNIFICANT EFFECT ON SALES Z SCORE insu pv fv cash opti LINE OF CREDIT eoq_miller CARD BANKER ACCEPTANC FACTOR SI DISC FOCAL WC REQUIRE K Sheet30 I Sheet1 Sheet2 ferences E , Sheet32 ODOB 9 1205 0 0 * * OENG 22-11-2019