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Consider again the comprehensive example involving Burlington Resources (Table 16.5). In this example, it was assumed that forecasted sales and expected EBIT, as well as the interest rates on short-term and long-term debt, were independent of the firm's working capital investment and financing policies. However, these assumptions are not always completely realistic in practice. Sales and EBIT are generally a function of the firm's inventory and receivables policies. Both of these policies, in turn, affect the firm's level of investment in working capital. Likewise, the interest rates on short-term and long-term debt are normally a function of the riskiness of the firm's debt as perceived by lenders and, hence, are affected by the firm's working capital investment and financing decisions. Recompute Burlington's rate of return on common equity under the following set of assumptions concerning sales, EBIT, and interest rates for each of the three different working capital investment and financing policies.
Application: Using Performance Reports to Inform Organizational Decisions, Prepare a performance report using spreadsheet software, such as Excel. Hint: Read the Weekly Briefing and watch the Performance Report video on this topic
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