CURRENT ASSETS INVESTMENT POLICY Rentz Corporation is investigating the optimal level of current assets for the coming...

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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 $3 million, and thefirm plans to maintain a 50% debt-to-assets ratio. Rentz's interestrate is currently 9% 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%.
What is the expected return on equity under each current assetslevel? Round your answers to two decimal places.
Restricted policy    %
Moderate policy    %
Relaxed policy    %
b. In this problem, we assume that expected sales areindependent of the current assets investment policy. Is this avalid assumption?
Yes, the current asset policies followed by the firm mainlyinfluence the level of fixed assets.
No, this assumption would probably not be valid in a real worldsituation. A firm's current asset policies may have a significanteffect on sales.
Yes, this assumption would probably be valid in a real worldsituation. A firm's current asset policies have no significanteffect on sales.
Yes, sales are controlled only by the degree of marketingeffort the firm uses, irrespective of the current asset policies itemploys.
Yes, the current asset policies followed by the firm mainlyinfluence the level of long-term debt used by the firm.

-Select-IIIIIIIVV

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4.4 Ratings (633 Votes)

a Calculation of ROE Formula for ROE Net income Stockholders equity given Estimated Sales 2 million Total fixed assets 3 million Debt to asset ratio will remain at 50 Calculation of net income under all the situation Situation 1 Restricted Policy Sales 2 million Total assets Fixed assets current assets 3 million 45 of sales 3 million 900000 39 million Debt ratio Total Debt Total Assets If debt ratio is 50 then 50 39 million Total debt Total debt 195 See Answer

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CURRENT ASSETS INVESTMENT POLICYRentz 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 $3 million, and thefirm plans to maintain a 50% debt-to-assets ratio. Rentz's interestrate is currently 9% 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%.What is the expected return on equity under each current assetslevel? Round your answers to two decimal places.Restricted policy %Moderate policy %Relaxed policy %b. In this problem, we assume that expected sales areindependent of the current assets investment policy. Is this avalid assumption?Yes, the current asset policies followed by the firm mainlyinfluence the level of fixed assets.No, this assumption would probably not be valid in a real worldsituation. A firm's current asset policies may have a significanteffect on sales.Yes, this assumption would probably be valid in a real worldsituation. A firm's current asset policies have no significanteffect on sales.Yes, sales are controlled only by the degree of marketingeffort the firm uses, irrespective of the current asset policies itemploys.Yes, the current asset policies followed by the firm mainlyinfluence the level of long-term debt used by the firm.-Select-IIIIIIIVV