Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects...

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Finance

Rentz Corporation is investigating the optimal level of currentassets for the coming year. Management expects sales to increase toapproximately $4 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 8% 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.
Restricted policy %
Moderate policy %
Relaxed policy %
b In this problem, we assume that expected sales are independentof the current assets investment policy. Is this a validassumption?
-Select-
Yes, the current asset policies followed by the firm mainlyinfluence the level of long-term debt used by the firm.
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.

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Rentz Corporation is investigating the optimal level of currentassets for the coming year. Management expects sales to increase toapproximately $4 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 8% 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.Restricted policy%Moderate policy%Relaxed policy%b In this problem, we assume that expected sales are independentof the current assets investment policy. Is this a validassumption?-Select-Yes, the current asset policies followed by the firm mainlyinfluence the level of long-term debt used by the firm.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.