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(ST-1) the Calgary company is attempting to establish a current assets policy. Fixed assets are $600,00, and the firm plans to maintain a 50 percent dept-to-assets ration. Calgary has no operating current liabilities. The interest rate is 10% on all dept. three alternative current asset policies are under consideration: 40, 50, and 60% of projected sales. The company expects to earn 15% before interest and taxes on sales of $3 million. Calgary effective federal-plus-state tax rate is 40%. What is the expected return on equity under each alternative?
ST-1 the Calgary company alternative balance sheets
Restricted (40%) moderate (50%) relaxed (60%)
Current assets (% of sales) $1,200,000 $1,500,000 $1,800,000
Fixed assets 600,000 600,000 600,000
Total assets $1,800,000 $2,100,000 $2,400,000
Debt $900,000 $1,050,000 $1,200,000
Equity 900,000 1,050,000 1,200,000
Total liabilities and equity $1,800,000 $2,100,000 $2,400,000
the Calgary company alternative income statements Restricted moderate relaxed
Sales $3,000,000 $3,000,000 $3,000,000
EBIT 450,000 450,000 450,000
Interest (10%) 90,000 105,000
ST-1 the Calgary company alternative balance sheets
Restricted (40%) moderate (50%) relaxed (60%)
Current assets (% of sales) $1,200,000 $1,500,000 $1,800,000
Fixed assets 600,000 600,000 600,000
Total assets $1,800,000 $2,100,000 $2,400,000
Debt $900,000 $1,050,000 $1,200,000
Equity 900,000 1,050,000 1,200,000
Total liabilities and equity $1,800,000 $2,100,000 $2,400,000
the Calgary company alternative income statements Restricted moderate relaxed
Sales $3,000,000 $3,000,000 $3,000,000
EBIT 450,000 450,000 450,000
Interest (10%) 90,000 105,000