Question the rentz corporation is attempting to determine, Ask an Expert

Accounting

Question: The Rentz Corporation is attempting to determine the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and the firm wishes to maintain a 60 percent debt ratio. Rentz's interest cost is currently 8 percent on both short-term and longer-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current asset level are available to the firm:

(1) a tight policy requiring current assets of only 45 percent of projected sales,

(2) a moderate policy of 50 percent of sales in current assets, and

(3) a relaxed policy requiring current assets of 60 percent of sales. The firm expects to generate earnings before interest and taxes at a rate of 12 percent on total sales.

a. What is the expected return on equity under each current asset level? (Assume a 40 percent effective federal-plus-state tax rate.)

b. In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption?

c. How would the overall riskiness of the firm vary under each policy?

View complete question

Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M92334238

Have any Question?Write your Review or question?

Related Questions in Accounting Basics

Question -waterway inc had net sales in 2017 of 1492600 at

Question - Waterway, Inc. had net sales in 2017 of $1,492,600. At December 31, 2017, before adjusting entries, the balances in selected accounts were Accounts Receivable $232,200 debit, and Allowance for Doubtful Account ...

Question - larry recently invested 23000 tax basis in

Question - Larry recently invested $23,000 (tax basis) in purchasing a limited partnership interest. His at-risk amount is also $23,000. In addition, Larry's share of the limited partnership loss for the year is $2,150, ...

Question - carpenter inc had a balance of 80000 in its

Question - Carpenter Inc. had a balance of $80,000 in its quality-assurance warranty liability account as of December 31, 2015. In 2016, Carpenter's warranty expenditures were $445,000. Its warranty expense is calculated ...

Question in this case management is presented with several

Question: In this case, management is presented with several decision options. For this assignment, you are required to provide a two to three single-spaced written memo evaluating options and providing recommendations. ...

Question - describe the allocation of inventoriable costs

Question - Describe the allocation of inventoriable costs may be made under any of the following assumptions as to the flow of costs (a) first-in, first-out (FIFO), (b) last-in, first-out (LIFO), or (c) average cost.

Question - the following information relates to nebula

Question - The following information relates to Nebula, Inc. Sales Revenue $240,000 Cost of Goods Sold 160,000 Interest Revenue 10,000 Operating Expenses 40,000 Sales Discounts 20,000 Sales Returns and Allowances 7,000 C ...

Question - the kuttner corp issued in 2014 for violating

Question - The Kuttner Corp issued in 2014 for violating patent laws. In 2014, the kuttner corp decides that a loss is probable, and records an expense of $23 million. What is the effect on income in 2016 if the case is ...

Question management research project requirementstopic -

Question: Management Research Project Requirements TOPIC - Each student will submit a research project that selects a current management problem and applies one or more principles of management discussed in the class to ...

Question - pina corporation wants to withdraw 113110

Question - Pina Corporation wants to withdraw $113,110 (including principal) from an investment fund at the end of each year for 9 years. What should be the required initial investment at the beginning of the first year ...

Question - a company had no office supplies at the

Question - A company had no office supplies at the beginning of the year. During the year, the company purchased $370 worth of office supplies. On December 31, $135 worth of office supplies remained. How much should the ...

4,153,160 Questions Asked
13,132 Experts
2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Recent Questions

Ask Accounting Basics Expert