Assume that Hogan Surgical Instruments Co. has $3,700,000 in assets. If it goes

Question

Assume that Hogan Surgical Instruments Co. has $3,700,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 15 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 $3,700,000 will be 7 percent, and with a long-term financing plan, the financing costs on the $3,700,000 will be 9 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) Most aggressive (15%-7%)*3,700,000 296000 b) Most conservative(11%-9%)*3700000 74000 c)1) (15%-9%)*3,700,000 222000 c)2) (11%-7%)*3700000 148000

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