Reference no: EM132604045

Butler Corporation is considering what level of current assets to maintain, as well as whether to use more or less long-term debt, as opposed to short-term debt.

Factors to consider:

Fixed assets - $8,000,000

Earnings before interest and taxes - $ 1,000,000

Tax rate - 25 percent

Optimal capital structure - 40 percent equity, 60 percent debt

Interest on short-term debt - 4 percent

Interest on long-term debt - 7 percent

Current asset level possibilities. Aggressive - $2,000,000 Conservative - $4,000,000.

Level of short-term debt possibilities. Aggressive - 80 percent of total debt. Conservative - 50 percent of total debt.

Required:

Question a) Calculate the return on equity for the aggressive and conservative plans.

Question b) Discuss which plan you would choose.