Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects...
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Rentz Corporation is investigating the optimal level of currentassets for the coming year. Management expects sales to increase toapproximately $3 million as a result of an asset expansionpresently being undertaken. Fixed assets total $1 million, and thefirm plans to maintain a 60% 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 10% 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.
Rentz Corporation is investigating the optimal level of currentassets for the coming year. Management expects sales to increase toapproximately $3 million as a result of an asset expansionpresently being undertaken. Fixed assets total $1 million, and thefirm plans to maintain a 60% 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 10% 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.
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