CURRENT ASSETS INVESTMENT POLICY

Rentz Corporation is investigating the optimal level of currentassets for the coming year. Management expects sales to increase toapproximately $2 million as a result of an asset expansionpresently being undertaken. Fixed assets total $1 million, and thefirm plans to maintain a 45% debt-to-assets ratio. Rentz's interestrate is currently 10% on both short-term and long-term debt (whichthe firm uses in its permanent structure). Three alternativesregarding the projected current assets level are underconsideration: (1) a restricted policy where current assets wouldbe only 45% of projected sales, (2) a moderate policy where currentassets would be 50% of sales, and (3) a relaxed policy wherecurrent assets would be 60% of sales. Earnings before interest andtaxes should be 13% of total sales, and the federal-plus-state taxrate is 40%.

1. What is the expected return on equity under each current assetslevel? Round your answers to two decimal places.
   

   Restricted policy		%
   Moderate policy		%
   Relaxed policy		%

2. 
   
3. In this problem, we assume that expected sales are independentof the current assets investment policy. Is this a validassumption?
   1. No, this assumption would probably not be valid in a real worldsituation. A firm's current asset policies may have a significanteffect on sales.
   2. Yes, this assumption would probably be valid in a real worldsituation. A firm's current asset policies have no significanteffect on sales.
   3. Yes, sales are controlled only by the degree of marketingeffort the firm uses, irrespective of the current asset policies itemploys.
   4. Yes, the current asset policies followed by the firm mainlyinfluence the level of long-term debt used by the firm.
   5. Yes, the current asset policies followed by the firm mainlyinfluence the level of fixed assets.
   
   -Select-IIIIIIIVVItem 4
4. 
   
5. How would the firm's risk be affected by the differentpolicies?
   
   The input in the box below will not be graded, but may be reviewedand considered by your instructor.

   Quantitative Problem: Adams Manufacturing Inc.buys $11.2 million of materials (net of discounts) on terms of2/10, net 50; and it currently pays after 10 days and takes thediscounts. Adams plans to expand, which will require additionalfinancing. If Adams decides to forgo discounts, how much additionalcredit could it obtain? Round your answer to the nearest cent. Donot round your intermediate calculations. Use 365 day in ayear.
   $

   What would be the nominal and effective cost of such a credit?Round your answer to 2 decimal places. Do not round intermediatecalculations. Use 365 day in a year.
   Nominal cost:  %
   Effective cost:  %

   If the company could receive the funds from a bank at a rate of9.1%, interest paid monthly, based on a 365-day year, what would bethe effective cost of the bank loan? Round your answer to 2 decimalplaces. Do not round intermediate calculations.
   ----- %

   Should Adams use bank debt or additional trade credit?
   -Select-The bank loan should be used.Additional trade credit shouldbe used.

Winston Inc. is trying to determine the effect of its inventoryturnover ratio and days sales outstanding on its cash conversioncycle. Winston's 2015 sales (all on credit) were $186,000 and itscost of goods sold was 75% of sales. It turned over its inventory8.19 times during the year. Its receivables balance at the end ofthe year was $13,156.44 and its payables balance at the end of theyear was $7,392.29. Using this information calculate the firm'scash conversion cycle. Round your answer to the nearest whole.Round the days amounts in your intermediate calculations to thenearest whole day. Do not round other intermediatecalculations.
-------- days