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
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Question
100%
The Calgary Company is attempting to establish a current assets policy. Fixed assets are
$600,000, and the firm plans to maintain a 40 percent debt-to-assets ratio. Calgary has no operating current liabilities. The interest rate is 12 percent on all debt. Three alternative current asset policies are under consideration: 40, 50, and 60 percent of projected sales. The company expects to earn 18 percent before interest and taxes on sales of $6 million. Calgary’s effective tax rate is 40 percent.
Questions
- What is the expected
return on equity under each alternative and why current assets policy is important in this particular situation? - Evaluate ROE from owner point of view and suggest which option is best for him?
- Suggest which option would you like if you are managers of the company and do not have much concern about business?
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