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Determine what expected return on equity under alternative

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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.

Question 1: What is the expected return on equity under each alternative?

Question 2: Evaluate ROE from owner point of view and suggest which option is best for him?

Question 3: Suggest which option would you like if you are managers of the company and do not have much concern about business?

Question 4: Why current assets policy is important in this particular situation?

Reference no: EM132636720

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