Calgary Company is thinking of modifying itscurrent assets investment policy. Fixed assets are $600,000, sales are projected at $3 million,the EBIT/Sales ratio is projected at 15%, the interest rate is 10% on all debt, the federalplus-state tax rate is 40%, and Calgary plans to maintain a 50% debt-to-assets ratio. Threealternative current assets investment policies are under consideration: 40%, 50%, and 60%of projected sales. What is the expected return on equity under each alternative?
Calgary Company is thinking of modifying itscurrent assets investment policy. Fixed assets are $600,000, sales are projected at $3 million,the EBIT/Sales ratio is projected at 15%, the interest rate is 10% on all debt, the federalplus-state tax rate is 40%, and Calgary plans to maintain a 50% debt-to-assets ratio. Threealternative current assets investment policies are under consideration: 40%, 50%, and 60%of projected sales. What is the expected return on equity under each alternative?
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 11P
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Calgary Company is thinking of modifying its
current assets investment policy. Fixed assets are $600,000, sales are projected at $3 million,
the EBIT/Sales ratio is projected at 15%, the interest rate is 10% on all debt, the federalplus-
state tax rate is 40%, and Calgary plans to maintain a 50% debt-to-assets ratio. Three
alternative current assets investment policies are under consideration: 40%, 50%, and 60%
of projected sales. What is the expected
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