Bass Corporation is considering whether to pursue an aggressive or conservative current asset policy, as well as an aggressive or conservative financing policy. The following information is available: Annual sales are $50,000,000. Fixed assets are $30,000,000. The debt ratio is 40 percent. EBIT is $3,000,000. Tax rate is 25 percent. With an aggressive policy, current assets will be 20 percent of sales; with a conservative policy, current assets will be 60 percent of sales. With an aggressive financing policy, short-term debt will be 60 percent of the total debt; with a conservative financing policy, short-term debt will be 20 percent of the total
Bass Corporation is considering whether to pursue an aggressive or conservative current asset policy, as well as an aggressive or conservative financing policy. The following information is available: Annual sales are $50,000,000. Fixed assets are $30,000,000. The debt ratio is 40 percent. EBIT is $3,000,000. Tax rate is 25 percent. With an aggressive policy, current assets will be 20 percent of sales; with a conservative policy, current assets will be 60 percent of sales. With an aggressive financing policy, short-term debt will be 60 percent of the total debt; with a conservative financing policy, short-term debt will be 20 percent of the total
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 9P
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Question
Bass Corporation is considering whether to pursue an aggressive or conservative current asset policy, as well as an aggressive or conservative financing policy. The following information is available:
- Annual sales are $50,000,000.
- Fixed assets are $30,000,000.
- The debt ratio is 40 percent.
- EBIT is $3,000,000.
- Tax rate is 25 percent.
- With an aggressive policy, current assets will be 20 percent of sales; with a conservative policy, current assets will be 60 percent of sales.
- With an aggressive financing policy, short-term debt will be 60 percent of the total debt; with a conservative financing policy, short-term debt will be 20 percent of the total debt.
- Interest rate for short-term debt is 6 percent. Interest rate for long-term debt is 11 percent.
Required:
- Determine the
return on equity for the aggressive approach and for the conservative approach. - Discuss which approach you would choose.
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