Comparative data at the end of this past year for three firms following aggressive, moderate, and conservative approaches to working capital policy follow (in thousands of dollars):
Aggressive Moderate Conservative
Temporary Current Assets $75 $75 $75
Permanent Current Assets $100 $100 $100
Fixed Assets $500 $500 $500
Total Assets $675 $675 $675
Current Liabilities $160 $75 $50
Long Term Debt $90 $150 $150
Stockholders Equity $425 $450 $475
Net Income $70 $70 $70
Calculate, compare, and comment on the current ratios, total debt to asset ratios, and returns on equity of the three firms.
Greenplanet Recycling Company is considering buying an additional facility at a cost of $500,000. The facility will have an economic life of five years. The company’s financial officer, Karen Holmes, can finance the project by:
a. A five-year loan at an annual interest rate of 13 percent
b. A one-year loan rolled over each year for five years
Compare the total interest expenses for both the preceding alternatives under the following assumptions, and calculate the savings in the interest expenses by choosing one of two alternatives:
1. The one-year loan has a constant interest rate of 11 percent per year over the next five years.
2. The one-year loan has an annual interest rate of 11 percent in the first two years, 14 percent in the third and fourth years, and 16 percent in the fifth year.