Reference no: EM132248494
Question - Landry 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 - $10,000,000
Earnings before interest and taxes - $ 1,000,000
Tax rate - 25 percent
Optimal capital structure - 60 percent equity, 40 percent debt
Interest on short term debt - 5 percent
Interest on long term debt - 9 percent
Current asset level possibilities. Aggressive - $3,000,000; Conservative - $5,000,000.
Level of short term debt possibilities. Aggressive - 60 percent of total debt; Conservative - 20 percent of total debt.
a) Determine the return on equity for each plan.
b) Which plan has the most risk? Explain why. Which plan would you recommend?
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