Reference for questions belowWORKING CAPITAL POLICYCalgary Company is thinking of modifying its working capital assets policy. Fixed assets are P600,000, sales areprojected at P3 million, the EBIT/sales ratio is projected at 15%, the interest rate is 10% on all debt, the tax rate is40%, and Calgary plans to maintain a 50% debt-to-assets ratio. Three altemative current asset policies are underconsideration: 40%, 50%, and 60% of projected sales.What is the expected return onequity under restricted 40%?Your answerWhat is the expected return onequity under moderate 50%?Your answerWhat is the expected return onequity under relaxed 60%?Your answer

Question is based on the ratio analysis and working capital management where possible wroking…

Answered: Reference for questions below WORKING…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter21: Supply Chains And Working Capital Management

Section: Chapter Questions

Problem 13P: Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth...

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Similar questions

Residual Distribution Policy Harris Company must set its investment and dividend policies for the coming year. It has three independent projects from which to choose, each of which requires a 3 million investment. These projects have different levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are as follows: Project A: Cost of capital = 17%; IRR = 20% Project B: Cost of capital = 13%; IRR = 10% Project C: Cost of capital = 7%; IRR = 9% Harris intends to maintain its 35% debt and 65% common equity capital structure, and its net income is expected to be 4,750,000. If Harris maintains its residual dividend policy (with all distributions in the form of dividends), what will its payout ratio be?
Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 40%. What is the expected return on equity under each current asset level? In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not? How would the overall risk of the firm vary under each policy?
Cost of Capital, Net Present Value Leakam Companys product engineering department has developed a new product that has a 3-year life cycle. Production of the product requires development of a new process that requires a current 100,000 capital outlay. The 100,000 will be raised by issuing 60,000 of bonds and by selling new stock for 40,000. The 60,000 in bonds will have net (after-tax) interest payments of 3,000 at the end of each of the 3 years, with the principal being repaid at the end of Year 3. The stock issue carries with it an expectation of a 17.5% return, expressed in the form of dividends at the end of each year (with 7,000 in dividends expected for each of the next 3 years). The sources of capital for this investment represent the same proportion and costs that the company typically has. Finally, the project will produce after-tax cash inflows of 50,000 per year for the next 3 years. Required: 1. Compute the cost of capital for the project. (Hint: The cost of capital is a weighted average of the two sources of capital, where the weights are the proportion of capital from each source.) 2. CONCEPTUAL CONNECTION Compute the NPV for the project. Explain why it is not necessary to subtract the interest payments and the dividend payments and appreciation from the inflow of 50,000 in carrying out this computation.

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