Assume that Hogan Surgical Instruments Co. has $3,800,000 in assets. If it goes

Question

Assume that Hogan Surgical Instruments Co. has $3,800,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 16 percent, but with a high-liquidity plan, the return will be 12 percent. If the firm goes with a short-term financing plan, the financing costs on the $3,800,000 will be 8 percent, and with a long-term financing plan, the financing costs on the $3,800,000 will be 10 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.

Explanation / Answer

a. return on most aggressive model = 16% - 8% = 8%

b. return using conservative approach = 12% - 10% = 2%

c. moderate involving low liquidity and shoert term financing = 16% - 10% = 6%

moderate involving high liquidity and long term financing = 12% - 8% = 4%

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