Reference no: EM13300957

Income statement for each company for strong, average, and weak economies using the following format:

Question Details

Aggressive Moderate Conservative
Current Assets $225,000 $300,000 $450,000
Fixed Assets 300,000 $300,000 300,000
Total Assets $525,000 $600,000 $750,000
Current liabilities (cost=12%) $300,000 $150,000 $750,000
Long-term debt (cost=10%) 0 150,000 300,000
Total Debt $300,000 $300,000 $375,000
Equity 225,000 300,000 375,000
Total Liabilities and equity 525,000 $600,000 $750,000
Current Ratio 0.75 2.0 6.0

The cost of goods sold functions for the three firms are as follows:

Cost of Goods Sold = Fixed Costs + Variable Costs
Aggressive: Cost of goods sold = $300,000 + 0.70 (Sales)
Moderate: Cost of goods sold = $405,000 + 0.65 (Sales)
Conservative: Cost of goods sold = $577,500 + 0.60 (Sales)

Because of working capital differences, sales for the three firms under different economic conditions are expected to vary as follows:
Aggressive Moderate Conservative
Strong economy $1,800,000 $1,875,000 $1,950,000
Average economy 1,350,000 1,500,000 1,725,000
Weak economy 1,050,000 1,200,000 1,575,000

Question:

A.Construct income statement for each company for strong, average, and weak economies using the following format:
Sales
Less: Cost of goods sold
Earnings before interest expense
Earnings before taxes (EBT)
Less: Taxes (at 40%)
Net income (NI)

b. Compare the returns on equity for the companies. Which company is best in a strong economy? In an average economy? In a weak economy?
e. What considerations for the management of working capital are indicated by this problem?