Which plan is the more aggressive

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Reference no: EM132912570

Monte Corporation wishes to analyze the joint impact of its working capital investment and financing policies on shareholders' return. The company has $80 million in fixed assets. Monte wishes to maintain a debt ratio of 40 %. The company's tax rate is 20 %.

The following information was developed for the two policies under consideration (dollars in millions):

                                                      Plan 1                Plan 2
Investment in current assets                   $30               $60
Amount of short-term debt                    $40                $20
EBIT                                                    $10.0           $11.0
Interest rate - LTD (%)                            9.0              8.0
Interest rate - STD (%)                           4.0              3.0

Required:

Problem a) Determine the return on equity for each plan.

Problem b) Which plan is the more aggressive? Which plan would you recommend?

Reference no: EM132912570

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