a. What is the expected return on equity under each current assets level? Round your answers to two decimal places. Restricted policy % % Moderate policy Relaxed policy % b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption? I. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales. II. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs. III. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm. IV. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets. V. No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales.
a. What is the expected return on equity under each current assets level? Round your answers to two decimal places. Restricted policy % % Moderate policy Relaxed policy % b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption? I. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales. II. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs. III. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm. IV. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets. V. No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed
assets total $2 million, and the firm plans to maintain a 60% debt-to-assets ratio. Rentz's interest rate is currently 8% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives
regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a
relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 10% of total sales, and the federal-plus-state tax rate is 40%.
a. What is the expected return on equity under each current assets level? Round your answers to two decimal places.
Restricted policy
Moderate policy
Relaxed policy
%
%
%
b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption?
I. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales.
II. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs.
III. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm.
IV. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets.
V. No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales.
-Select- ✓
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education