Assume that Hogan Surgical Instruments Co. has $3,600,000 in assets. If it goes

Question

Assume that Hogan Surgical Instruments Co. has $3,600,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 14 percent, but with a high-liquidity plan, the return will be 10 percent. If the firm goes with a short-term financing plan, the financing costs on the $3,600,000 will be 6 percent, and with a long-term financing plan, the financing costs on the $3,600,000 will be 8 percent. a. Compute the anticipated return after financing costs with the most aggressive asset-financing mix Anticipated return b. Compute the anticipated return after financing costs with the most conservative asset-financing mix. Anticipated return c. Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix. Anticipated Return Low liquidity High liquidity

Explanation / Answer

1 Low liquidity return 3600000*14% 504000 Short term financing 3600000*6% 216000 Anticipated return 288000 2 High Liquidity return 3600000*10% 360000 Long term financing 3600000*8% 288000 Anticipated returnm 72000 3 Low Liquidity 504000 Low Liquidity Long Term financing 288000 anticipated return 216000 High Liquidity 360000 High Liquidity Short Term Financing 216000 anticipated return 144000 a Anticipated Return 288000 b Anticipated Return 72000 c Low Liquidity Anticipated Return 216000 High Liquidity Anticipated Return 144000

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