A. Assume that Hogan Surgical Instruments Co. has $2,100,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 14 percent, but with a high-liquidity plan, the return will be 10 percent. If the firm goes with a short-term financing plan, the financing costs on the $2,100,000 will be 6 percent, and with a long-term financing plan, the financing costs on the $2,100,000 will be 8 percent.
a-1. Compute the anticipated return after financing costs with the most aggressive asset-financing mix.
b-1. Compute the anticipated return after financing costs with the most conservative asset-financing mix.
c-1. Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix.
B. Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $220,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 70 percent of sales. The firm is in the 15 percent tax bracket.
a-2. Compute the incremental income after taxes.
b-2. What will Johnson’s incremental return on sales be if these new credit customers are accepted? (Input your answer as a percent rounded to 2 decimal places.)
c-2. If the accounts receivable turnover ratio is 4 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Low Liquidity:
High Liquidity: