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Rentz Corporation seeks to determine the optimal level of current

Berikut ini adalah pertanyaan dari almakmuriyahnurul pada mata pelajaran IPS untuk jenjang Sekolah Menengah Atas

Rentz Corporation seeks to determine the optimal level of current assets for the coming year. Management estimates sales will increase to approximately $2 million as a result of the asset expansion currently underway. Total fixed assets are $1 million, and the company wants to maintain a debt ratio of 60%. Rentz's current interest charge is 8% on both short-term and long-term debt (both the company uses in its permanent capital structure). Three alternatives regarding the projected level of current assets are available to firms: (1) a strict policy requiring current assets to be only 45% of projected sales, (2) a moderate policy of 50% of sales of current assets, and (3) a relaxed policy requiring current of 60% of sales. The company expects to generate income before interest and taxes at a rate of 12% of total sales.Question:
a. What is the expected return on equity at each current level of assets? (Assume an effective federal-plus-state tax rate of 40%.)
b. In this problem, it is assumed that the expected sales level is independent of the current asset policy. Is this a valid assumption?
c. How does the overall risk of the company vary by policy?​

Jawaban dan Penjelasan

Berikut ini adalah pilihan jawaban terbaik dari pertanyaan diatas.

Jawaban:

a. To determine the expected return on equity for each current asset policy, we need to calculate the expected income before interest and taxes (EBIT) and the expected net income for each policy.

For the strict policy (current assets equal to 45% of sales), the level of current assets would be $900,000 ($2,000,000 x 45%), the EBIT would be $240,000 ($2,000,000 x 12%), and the expected net income would be $144,000 (EBIT x (1 - tax rate)). This would give an expected return on equity of 18% ($144,000 / $800,000).

For the moderate policy (current assets equal to 50% of sales), the level of current assets would be $1,000,000 ($2,000,000 x 50%), the EBIT would be $240,000 ($2,000,000 x 12%), and the expected net income would be $144,000 (EBIT x (1 - tax rate)). This would give an expected return on equity of 18% ($144,000 / $800,000).

For the relaxed policy (current assets equal to 60% of sales), the level of current assets would be $1,200,000 ($2,000,000 x 60%), the EBIT would be $240,000 ($2,000,000 x 12%), and the expected net income would be $144,000 (EBIT x (1 - tax rate)). This would give an expected return on equity of 18% ($144,000 / $800,000).

b. The assumption that the expected sales level is independent of the current asset policy is not necessarily valid. The level of current assets can affect the company's ability to meet customer demand and fulfill orders, which could in turn affect the level of sales.

c. The overall risk of the company may vary by policy depending on the level of current assets. A strict policy with a lower level of current assets may result in a higher risk of not being able to meet customer demand and fulfill orders, while a relaxed policy with a higher level of current assets may result in a lower risk in this regard. However, a higher level of current assets may also result in a higher risk of financial distress due to the increased borrowing required to finance the assets

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Last Update: Sat, 01 Apr 23
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