Question

Asked Dec 12, 2019

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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:**

**Calculate the return on equity for the aggressive and conservative plans.****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

**Excel Spreadsheet:**

Step 2

**Excel Workings:**

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