# Sugar Corporation is considering what level of current assets to maintain, as well as whether to use more or less long-term debt, as opposed to short-term debt.Factors to consider:Fixed assets - \$6,000,000Earnings before interest and taxes - \$ 800,000Tax rate – 30 percentOptimal capital structure – 60 percent equity, 40 percent debtInterest on short-term debt – 5 percentInterest on long-term debt – 8 percentCurrent asset level possibilities. Aggressive - \$1,000,000 Conservative - \$1,500,000.Level of short-term debt possibilities. Aggressive – 70 percent of total debt.  Conservative – 40 percent of total debt. Required:Calculate the return on equity for the aggressive and conservative plans.Discuss which plan you would choose.

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Sugar Corporation is considering what level of current assets to maintain, as well as whether to use more or less long-term debt, as opposed to short-term debt.

Factors to consider:

• Fixed assets - \$6,000,000
• Earnings before interest and taxes - \$ 800,000
• Tax rate – 30 percent
• Optimal capital structure – 60 percent equity, 40 percent debt
• Interest on short-term debt – 5 percent
• Interest on long-term debt – 8 percent
• Current asset level possibilities. Aggressive - \$1,000,000 Conservative - \$1,500,000.
• Level of short-term debt possibilities. Aggressive – 70 percent of total debt.  Conservative – 40 percent of total debt.

Required:

1. Calculate the return on equity for the aggressive and conservative plans.
2. Discuss which plan you would choose.
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Step 1

1.

Calculation of Return on Equity:

The return on equity of aggressive plans is 10.58% and return on equity of conservative plans is 9.27%.

Step 2

Excel Workings:

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