expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and the firm plans to maintain a 55% debt-to-assets ratio. Rentz's interest rate is currently 10% 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 12% of total sales, and the federal - plus - state tax rate is 40%
expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and the firm plans to maintain a 55% debt-to-assets ratio. Rentz's interest rate is currently 10% 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 12% of total sales, and the federal - plus - state tax rate is 40%
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 11P
Related questions
Question
![Rentz Corporation is investigating the optimal level of
current assets for the coming year. Management
expects sales to increase to approximately $4 million as
a result of an asset expansion presently being
undertaken. Fixed assets total $1 million, and the firm
plans to maintain a 55% debt-to - assets ratio. Rentz's
interest rate is currently 10% 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 12% of
total sales, and the federal-plus-state tax rate is 40%.
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 %](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F64e40614-e7c1-4c81-8337-fb32adffa3bb%2F067271f9-412b-413c-a076-58961b854d3b%2Ficmv5z_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Rentz Corporation is investigating the optimal level of
current assets for the coming year. Management
expects sales to increase to approximately $4 million as
a result of an asset expansion presently being
undertaken. Fixed assets total $1 million, and the firm
plans to maintain a 55% debt-to - assets ratio. Rentz's
interest rate is currently 10% 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 12% of
total sales, and the federal-plus-state tax rate is 40%.
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 %
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