Cousins 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 $80,000,000. Fixed assets are $40,000,000. The debt ratio is 40 percent. EBIT is $8,000,000. Tax rate is 25 percent. With an aggressive policy, current assets will be 30 percent of sales; with a conservative policy, current assets will be 70 percent of sales. With an aggressive financing policy, short-term debt will be 40 percent of the total debt; with a conservative financing policy, short-term debt will be 15 percent of the total debt. Interest rate for short-term debt is 10 percent. Interest rate for long-term debt is 14 percent. Required: Determine the return on equity for the aggressive approach and for the conservative approach. Discuss which approach you would choose.
Cousins 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 $80,000,000. Fixed assets are $40,000,000. The debt ratio is 40 percent. EBIT is $8,000,000. Tax rate is 25 percent. With an aggressive policy, current assets will be 30 percent of sales; with a conservative policy, current assets will be 70 percent of sales. With an aggressive financing policy, short-term debt will be 40 percent of the total debt; with a conservative financing policy, short-term debt will be 15 percent of the total debt. Interest rate for short-term debt is 10 percent. Interest rate for long-term debt is 14 percent. Required: Determine the return on equity for the aggressive approach and for the conservative approach. Discuss which approach you would choose.
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 9P
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Question
Cousins 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 $80,000,000.
- Fixed assets are $40,000,000.
- The debt ratio is 40 percent.
- EBIT is $8,000,000.
- Tax rate is 25 percent.
- With an aggressive policy, current assets will be 30 percent of sales; with a conservative policy, current assets will be 70 percent of sales.
- With an aggressive financing policy, short-term debt will be 40 percent of the total debt; with a conservative financing policy, short-term debt will be 15 percent of the total debt.
- Interest rate for short-term debt is 10 percent. Interest rate for long-term debt is 14 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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