Reference no: EM131792677
Question: Current assets investment policy
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 being undertaken. Fixed assets total $3 million, and the firm plans to maintain a 50% debt-to-assets ratio. Rentz's interest rate is currently 9% 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: a restricted policy where current assets would be only 45% of projected sales, a moderate policy where current assets would be 50% of sales, and 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%.
a. 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 %
b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption?
I. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs.
II. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm.
III. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets.
IV. No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales.
V. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales.
c. How would the firm's risk be affected by the different policies?
|
Calculate the annual end-of-year loan payment
: How much of the first payment is interest, Calculate the annual end-of-year loan payment
|
|
Determine the amount of net income or net loss for the year
: For each of the following, determine the amount of net income or net loss for the year. Revenues for the year totaled $88,500 and expenses totaled $40,500
|
|
What is the company after-tax dividend income
: Your corporation has a marginal tax rate of 40% and has purchased preferred stock in another company. The before-tax dividend income on the preferred stock.
|
|
How will the loss be treated for tax purposes
: Sam, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244, How will loss be treated for tax purposes
|
|
Expected return on equity under each current assets level
: Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million.
|
|
Each step of the personal selling process
: Assume that you are a sales rep for a textbook company. Discuss what you would do in each step of the Personal Selling Process.
|
|
Provide a general overview outlining the key issues
: Provide a general, high-level overview outlining the key issues, high-level recommendations, and important considerations to remediate performance.
|
|
The power to do something versus the right to do something
: Can you distinguish between the power to do something versus the right to do something? How does it relate to the topic of assignment of contracts?
|
|
What is the norm or framework within which a double tax
: Explain how bilateral relief is made and how does this differ from a unilateral relief
|