23 Jul WHAT IS THE EXPECTED RETURN ON EQUITY UNDER EACH CURRENT ASSET LEVEL?
Rentz Corporation is investigating the optimal level of current ass Show more Current assets investment policy Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total $3 million and the firm plans to maintain a 55% debt-to-assets ratio. Rentzs interest rate is currently 9% on both short-term and longer-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current asset level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales (2) a moderate policy where current assets would be 50% of sales and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 14% of total sales and the federal-plus-state tax rate is 40%. What is the expected return on equity under each current asset level? Round your answers to two decimal places. Restricted policy % Moderate policy % Relaxed policy % Show less
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