Expected return on equity under each current asset level

Assignment Help Financial Management

Reference no: EM13928111

Payne Product's sales last year were anemic $1.6 million, but with an improved product mix it expects sales growth to be 25% this year, and Payne would like to determine the effect of various current asset policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne's debt interest rate is currently %. You are to evaluate three different current asset policies: (1) a tight policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes is expected to be 12% of sales. Payne's tax rate is 40%.

a) What is the expected return on equity under each current asset level?

b) In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not?

c) How would the overall riskiness of the firm vary under each policy?

Reference no: EM13928111

Questions Cloud

Expected return on market-what must the risk-free rate : A stock has an expected return of 13.6 percent and a beta of 1.17, and the expected return on the market is 12.6 percent. What must the risk-free rate be?

Explain the above four methods of forecasting exchange rates : In forecasting exchange rates, many practitioners use either the Interest Rate Parity, Purchase Price Parity, Asset Approach, or the Balance of Payments Approach. Please define and explain the above four methods of forecasting exchange rates, includi..

Strategic leadership and innovation at apple inc : Read Case 23: Strategic Leadership and Innovation at Apple Inc. Answer questions 1-4 in a three to five page APA style paper, and supported with the concepts outlined in your text and from your previous classes.

What probability that year one net cash flows will negative : The management of Greensboro Products has been evaluating the risk of the cash flows associated with a proposed new project. What is the probability that year 1 net cash flows will be negative?

Expected return on equity under each current asset level : Payne Product's sales last year were anemic $1.6 million, but with an improved product mix it expects sales growth to be 25% this year, and Payne would like to determine the effect of various current asset policies on its financial performance. What ..

Explain what is meant by the impossible trinity : (A) Please define and explain what is meant by the “Impossible Trinity,” being sure to thoroughly define the relevancy of each facet of the triangle. (B) Please define and explain how the concept of the “Impossible Trinity” applies both to the establ..

What is the one year future exchange rate : John wants to build a new building. He needs $35 million. He may borrow in the US at 4.5% or in the UK for 7.5% for 1 year. The current exchange rate is $1.5:£1.0. What is the 1 year future exchange rate?

Reimburses losses on an actual-cash value basis : Sarah Kavenna's luxurious home in Georgetown, a neighbourhood in Washington dc, was recently gutted in a fire. Her living and dining rooms were destroyed completely, and the damaged personal property had a replacement price of $27,000. What is the ma..

What is the expected rate of return on stock with beta : The risk-free rate of return is 4.2 percent and the market risk premium is 11 percent. What is the expected rate of return on a stock with a beta of 1.8?

User Account

All Pages