Superior Brands, Inc., wishes to analyze the joint impact of its working capital investment and financing policies on shareholder return and risk. The company has $40 million in fixed assets. Also, the firm's financial structure consists of short-term and long-term debt and common equity. Superior wishes to maintain a debt-to-total assets ratio of 50 percent, where debt consists of both short-term and long-term sources. The company's tax rate is 40 percent. The following information was developed for three different policies under consideration:
a. Determine the following for each of the three working capital investment and financing policies:
i. Expected rate of return on stockholders' equity
ii. Net working capital position
iii. Current ratio
b. Evaluate the profitability versus risk trade-offs associated with these threepolicies.