Assume that Hogan Surgical Instruments Co. has $2,800,000 in assets. If it goes

Question

Assume that Hogan Surgical Instruments Co. has $2,800,000 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 $2,800,000 will be 8 percent, and with a long-term financing plan, the financing costs on the $2,800,000 will be 10 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

A:Most aggressive plan will be low liquidity and short term plan

Return = $2,800,000*(16%-8%)

= 224000

B: Most conservative plan will be high liquidity and long term

Return = $2,800,000((12%-10%)

= $56000

C:Moderate approach

Low liquidity, long term

Return=$2,800,000*(16%-10%)= $168,000

Or

High liquidity, short term

Return =$2,800,000*(12%-8%)=$112000

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