Question

Rentz Corporation Is investigating the optimal level of current assets for the coming year. Management expects sales to Increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $3 million, and the firm plans to maintain a 40 % debt-to-assets ratio. Rentz's Interest rate is currently 8% on both short-term and long-term debt (which the firm uses in its permanent structure). Three altenatives 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 %. a. 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 % b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a yalid assumption? 1. 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. II. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales. III. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs. IV. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm. V. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets. -Select- C. How would the firm's risk be affected by the different policies? The input in the box below will not be graded, but may be reviewed and considered by your instructor

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 Calibri 11 E Copy Paste Format Painter Clipboard AA = = = A E E E B I U - D Dr Wrap Text General s FMerce Merge & Center Center $ - % % Alignment CD Number 4.0 .00 8.9 Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Font Cells B1266 AW AX SALES AY 4000000 AZ BA BB BC BD BE BE BH B J BL BMA BG 100% TOTAL ASSETS 4800000 BI 40% DEBT 1920000 BK 60% EQUITY 2880000 FIXED ASSETS 3000000 RESTRICTED POLICY MODERATE POLICY CURRENT ASSETS 1800000 45% OF SALES 2000000 50% OF SALES 2400000 60% OF SALES 3000000 5000000 2000000 3000000 RELAXED POLICY 3000000 5400000 2160000 3240000 EBIT % of sales = rate of interest = 8% _ 255 256 257 258 259 260 261 262 263 264 265 266 267 268 269 270 271 272 273 274 275 ™ Rea 13% 520000 EBIT INTEREST EBT TAX (40%) NET INCOME RETURN ON EQUITY RESTRICTED 520000 153600 366400 146560 219840 7.63% MODERATE 520000 160000 360000 144000 216000 7.20% RELAXED 520000 172800 (8% ON DEBT) 347200 138880 208320 6.43% [NET INCOME/EQUITY] K Sheet1 Sheet2 ferences NO, THIS ASSUMPTION WOULD PROBABLY 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 Sheet30 I BOJ 120% 2. 9 * * OENG + 1a e 9 . 24-11-2019

- 2x Find & Select BL BM WORKING CAPITAL APPROACH - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri 11 AA = = = Dr Wrap Text General E Copy Fill Paste B I U B- E A E E s FMerce Merge & Center - Center Format Painter $ -% % 4.0 .00 . Conditional Format Cell Insert Delete Format Sort & Formatting as Table Styles 2 Clear Filter Clipboard Font Alignment Number Styles Cells Editing B1306 - five AW AX AY A Z BA BB BC BD BE BF BG BH BI B J BK 287 288 289 290 291 EACH POLICY HAS ITS ADVANTAGES & DISADVANTAGES 292 RESTRICTED POLICY WILL REDUCE SALES BUT WILL ALSO REDUCE BAD DEBT AND OTHER COLLECTION EXPENSES AND SO RISK 293 RELAXED POLICY WILL INCREASE SALES BUT WILL ALSO INCREASE BAD DEBT AND COLLECTION COSTS AND SO RISK INCREASES MODERATE POLICY IS LARGELY FOLLOWED BY MAJOR COMPANIES AS THEY FOLLOW HOW MARKET BEHAVES SO RISK IS MODERATE HERE 295 BUT IT STILL DEPENDS ON HOW COMPANY IS ABLE TO TACKLE THE SITUATION 296 297 298 299 300 301 294 302 303 304 305 306 307 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 20J 120% Rea 1 + Ha é o . DAS W 2x RALIS D. 29. * 4 40 ENG 04:08