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

Question

Assume that Hogan Surgical Instruments Co. has $3,000,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high-liquidity plan, the return will be 14 percent. If the firm goes with a short-term financing plan, the financing costs on the $3,000,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $3,000,000 will be 12 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. Anticipated return: Low liquidity- High liquidity-

Explanation / Answer

a. Most aggressive Low liquidity $3,000,000 * 18% = $540,000 Short-term financing –3,000,000 * 10% = 300,000 Anticipated return $240,000 b. Most conservative High liquidity $3,000,000 * 14% = $420,000 Long-term financing –3,000,000 * 12% = 360,000 Anticipated return $ 60,000 c. Moderate approach $3,000,000 * 18% = $540,000 Low liquidity –3,000,000 * 12% = 360,000 Long-term financing $180,000 Or High liquidity $3,000,000 * 14% = $420,000 Short-term financing –3,000,000 * 10% = 300,000 $ 120,000

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