Assume that Atlas Sporting Goods Inc. has $880,000 in assets. If
it goes with a low-liquidity plan for the assets, it can earn a
return of 12 percent, but with a high-liquidity plan the return
will be 9 percent. If the firm goes with a short-term financing
plan, the financing costs on the $880,000 will be 6 percent, and
with a long-term financing plan, the financing costs on the
$880,000 will be 7 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?
Lower | |
Higher |
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Assume that Atlas Sporting Goods Inc. has $880,000 in assets. If it goes with a low-liquidity...
Assume that Atlas Sporting Goods Inc. has $880,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 12 percent, but with a high-liquidity plan the return will be 9 percent. If the firm goes with a short-term financing plan, the financing costs on the $880,000 will be 6 percent, and with a long-term financing plan the financing costs on the $880,000 will be 7 percent. a. Compute the anticipated return after...
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Guardian Inc. is trying to develop an asset-financing plan. The firm has $330,000 in temporary current assets and $230,000 in permanent current assets. Guardian also has $430,000 in fixed assets. Assume a tax rate of 40 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 80 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest...
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