Assume that Hogan Surgical Instruments Co. has $2,500,000 in assets. If it goes

Question

Assume that Hogan Surgical Instruments Co. has $2,500,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high liquidity plan, the return will be 14 percent. If the firm goes with a short-term financing plan, the financing costs on the $2,500,00 will be 10 percent and with a long-term financing plan, the financing cost on the $2,500,00 will be 12 percent. (review table 6-11 for parts a, b, and c of this problem).

a. compute the anticipated return after financing cost with the most aggressive asset-financing mix.

b. Compute the anticipated return after financing cost with the most conservative asset-financing mix.

c. Compute the anticipated return after financing costs with two moderate approaches to the asset financing mix.

Explanation / Answer

a).the most aggressive asset-financing mix: low-liquidity with short-term financing

investment return= 2,500,000*18%= $450,000

financing cost=2,500,000*10%= $250,000

the anticipated return after financing cost= 450,000- 250,000= $200,000

b).the most conservative asset-financing mix: high-liquidity with long-term financing

investment return= 2,500,000*14%= $350,000

financing cost=2,500,000*12%= $300,000

the anticipated return after financing cost= $350,000-$300,000=$50,000

c).The materials are not complete.The two moderate approaches are not given.

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