Assume that Atlas Sporting Goods Inc. has $1,040,000 in assets. If it goes with

Question

Assume that Atlas Sporting Goods Inc. has $1,040,000 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 11 percent. If the firm goes with a short-term financing plan, the financing costs on the $1,040,000 will be 8 percent, and with a long-term financing plan, the financing costs on the $1,040,000 will be 9 percent.

Compute the anticipated return after financing costs with the most aggressive asset-financing mix.

Compute the anticipated return after financing costs with the most conservative asset-financing mix.

Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix.

If the firm used the most aggressive asset-financing mix described in part a and had the anticipated return you computed for part a, what would earnings per share be if the tax rate on the anticipated return was 30 percent and there were 20,000 shares outstanding? (Round your answer to 2 decimal places.)

Now assume the most conservative asset-financing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? (Round your answer to 2 decimal places.)

Would the conservative mix have higher or lower earnings per share than the aggressive mix?

Assume that Atlas Sporting Goods Inc. has $1,040,000 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 11 percent. If the firm goes with a short-term financing plan, the financing costs on the $1,040,000 will be 8 percent, and with a long-term financing plan, the financing costs on the $1,040,000 will be 9 percent.

Explanation / Answer

Answer a Aanticipated return after financing costs with the most aggressive asset-financing mix. Invested amount Rate Return Maximum return 1040000 14% 145600 Minimum Financing cost 1040000 8% 83200 Anticipated Return will be 62400 Anticipated Return will be $ 62400 Answer b Anticipated return after financing costs with the most conservative asset-financing mix. Invested amount Rate Return Minimum return 1040000 11% 114400 Maximum Financing cost 1040000 9% 93600 Anticipated Return will be 20800 Anticipated Return will be $ 20800 Answer c anticipated return after financing costs with the two moderate approaches to the asset-financing mix. Low liquidity Invested amount Rate Return Low Liquidity return 1040000 14% 145600 Long termFinancing cost 1040000 9% 93600 Anticipated Return will be 52000 Anticipated Return will be $ 52000 High liquidity Invested amount Rate Return High Liquidity return 1040000 11% 114400 Short termFinancing cost 1040000 8% 83200 Anticipated Return will be 31200 Anticipated Return will be $ 31200 Answer d Earning Per Share Total earning in "a" 62400 Less Tax @ 30% 18720 Net Income 43680 Total Shares 20000 Earning Per Share 2.184 Earning Per Share will be $ 2.184 Answer e 1 Earning Per Share Total earning in "b" 20800 Less Tax @ 30% 6240 Net Income 14560 Total Shares 5000 Earning Per Share 2.912 Earning Per Share will be $ 2.912 Answer e 2 Conservative mix have Higher EPS than aggressive mix.

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