Current assets investment policy Rentz Corporation is investigating The optimal
ID: 2384365 • Letter: C
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 $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 8% on both short-term and longer-term debt (which The firm uses in its permanent structure). Three alternatives regarding The projected current asset 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 10% of total sales, and The federal-plus-state tax rate is 40%. What is The expected return on equity under each current asset level? Round your answers to two decimal places. In this Problem, we assume that expected sales are independent of The current assets investment policy. Is this a valid assumption? Yes, The current asset policies followed by The firm mainly influence The level of fixed assets. 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. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales. Yes, sales are controlled only by The degree of marketing effort The firm uses, irrespective of The current asset policies it employs. Yes, The current asset policies followed by The firm mainly influence The level of long-term debt used by The firm.Explanation / Answer
a.
Rentz Corporation's alternative balance sheets
Restricted (45%) moderate (50%) relaxed (60%)
Current assets (% of sales) $1350000 $1500000 $1800000
Fixed assets 3000000 3000000 3000000
Total assets $4350000 $4500000 $4800000
Debt $1957500 $2025000 $2160000
Equity 2392500 2475000 2640000
Total liabilities and equity $1957500 $4500000 $4800000
Income statements
b.
Answer is II
Restricted Moderate Relaxed Sales 3000000 3000000 3000000 EBIT 300000 300000 300000 Interest 156600 162000 172800 EBT 143400 138000 127200 EAT 86040 82800 76320 ROE 3.60% 3.45% 2.89%Related Questions
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