Bass Corporation is considering whether to pursue an aggressive or conservative current asset policy, as well as an aggressive or conservative financing policy. The following information is available: Annual sales are $50,000,000. Fixed assets are $30,000,000. The debt ratio is 40 percent. EBIT is $3,000,000. Tax rate is 25 percent. With an aggressive policy, current assets will be 20 percent of sales; with a conservative policy, current assets will be 60 percent of sales. With an aggressive financing policy, short-term debt will be 60 percent of the total debt; with a conservative financing policy, short-term debt will be 20 percent of the total

Bass Corporation is considering whether to pursue an aggressive or conservative current asset policy, as well as an aggressive or conservative financing policy. The following information is available: Annual sales are $50,000,000. Fixed assets are $30,000,000. The debt ratio is 40 percent. EBIT is $3,000,000. Tax rate is 25 percent. With an aggressive policy, current assets will be 20 percent of sales; with a conservative policy, current assets will be 60 percent of sales. With an aggressive financing policy, short-term debt will be 60 percent of the total debt; with a conservative financing policy, short-term debt will be 20 percent of the total

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 7P

See similar textbooks

Similar questions

Cousins Corporation is considering whether to pursue an aggressive or conservative current asset policy, as well as an aggressive or conservative financing policy. The following information is available: Annual sales are $80,000,000. Fixed assets are $40,000,000. The debt ratio is 40 percent. EBIT is $8,000,000. Tax rate is 25 percent. With an aggressive policy, current assets will be 30 percent of sales; with a conservative policy, current assets will be 70 percent of sales. With an aggressive financing policy, short-term debt will be 40 percent of the total debt; with a conservative financing policy, short-term debt will be 15 percent of the total debt. Interest rate for short-term debt is 10 percent. Interest rate for long-term debt is 14 percent. Required: Determine the return on equity for the aggressive approach and for the conservative approach. Discuss which approach you would choose.
Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. Refer to the data for Hardwig, Inc.Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?
Jasper Enterprises follows a moderate current asset investment policy, but it is now considering whether to shift to a restricted or perhaps to a relaxed policy. The firm's annual sales are $400,000, its fixed assets are $100,000, its target capital structure calls for 50% debt and 50% equity, its EBIT is $35,000, the interest rate on its debt is 10%, and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies? 5.3% Oa 06.43% Oe: 47% Od 5.8%
National Co. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P400,000; its fixed assets are P150,000; debt and equity are each 50 percent of total assets. EBIT is P36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
Big Retailer (BR) follows a moderate current asset investment policy, but is now considering a change, perhaps to a restricted or maybe to a relaxed policy. BR’s annual sales are $1,400,000; its fixed assets are $950,000; its target capital structure calls for 40% debt and 60% equity; its EBIT is $600,000; the interest rate on debt is 8%; and its tax rate is 20%. With a restricted policy, current assets will be 20% of sales, while under a relaxed policy, current assets will be 35% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
Calgary Company is thinking of modifying itscurrent assets investment policy. Fixed assets are $600,000, sales are projected at $3 million,the EBIT/Sales ratio is projected at 15%, the interest rate is 10% on all debt, the federalplus-state tax rate is 40%, and Calgary plans to maintain a 50% debt-to-assets ratio. Threealternative current assets investment policies are under consideration: 40%, 50%, and 60%of projected sales. What is the expected return on equity under each alternative?
Bulldogs Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P500,000; its fixed assets are P200,000; debt and equity are each 50% of total assets. EBIT is P40,000, the interest rate on the firm’s debt is 10%, and the firm’s tax rate is 25%. Current assets will be 10% of sales with a restricted policy. Under a relaxed policy, current assets will be 20% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies? 5.40% 3.57% 4.00% 3.20%
F Enterprises is evaluating whether to do a either a restricted or relaxed investment policy on current assets. The sales of F Enterprises for the year is P400,000 while fixed assets are P100,000. Debt represents half of the firm’s assets. The firm’s debt has an interest rate of 10%. The EBIT of F Enterprises is P36,000. The entity is subject to income tax rate of 40%. Using a restricted policy, current assets will account for 15% of sales while the relaxed policy will increase share of current assets to 25 percent of sales. What will be the variance between projected return on equity between restricted and the relaxed investment policy on current assets?
Sugar Corporation is considering what level of current assets to maintain, as well as whether to use more or less long-term debt, as opposed to short-term debt. Factors to consider: Fixed assets - $6,000,000 Earnings before interest and taxes - $ 800,000 Tax rate – 30 percent Optimal capital structure – 60 percent equity, 40 percent debt Interest on short-term debt – 5 percent Interest on long-term debt – 8 percent Current asset level possibilities. Aggressive - $1,000,000 Conservative - $1,500,000. Level of short-term debt possibilities. Aggressive – 70 percent of total debt. Conservative – 40 percent of total debt. Required: Calculate the return on equity for the aggressive and conservative plans. Discuss which plan you would choose.
Perseverance Corporation is deciding whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total P3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is P150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. What's the difference in the projected ROES under the restricted and relaxed policies? [Round off to one decimal place.)
The Haris - Arshi Company is attempting to establish a current assets polıcy. Company has allocated $900,000 to fixed assets and the firm plans to maintain a 50 percent debt to assets a ratio. The interest rate is 10% on all debts. Company is considering three alternative current asset policies: this can be 40, 50 or 60 percent of projected sales. The company expects to earn 20 percent profit before interest and taxes on sales of $3 million. Company's effective federal-plus-state-tax rate is 15 percent. What is the expected return on equity under each alternative? Drawa descriptive conclusion for each Current ASset Investment Policy.
The Calgary Company is attempting to establish a current assets policy. Fixed assets are $600,000, and the firm plans to maintain a 40 percent debt-to-assets ratio. Calgary has no operating current liabilities. The interest rate is 12 percent on all debt. Three alternative current asset policies are under consideration: 40, 50, and 60 percent of projected sales. The company expects to earn 18 percent before interest and taxes on sales of $6 million. Calgary’s effective tax rate is 40 percent. What is the expected return on equity under each alternative? Evaluate ROE from owner point of view and suggest which option is best for him? Suggest which option would you like if you are managers of the company and do not have much concern about business? Why current assets policy is important in this particular situation?