Question

Assume that Hogan Surgical Instruments Co. has $4,100,000 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 $4,100,000 will be 6 percent, and with a long-term financing plan, the financing costs on the $4,100,000 will be 8 percent.

a. Compute the anticipated return after financing costs with the most aggressive asset-financing mix.
  

	Anticipated return?

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

	Anticipated return

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

	Anticipated Return
Low liquidity
High liquidity

Answer 1

Hogan Surgical Instruments Company

a. Most aggressive

Low liquidity $4,100,000 * 14% = $574,000
Short-term financing –4,100,000 * 6% = 246,000
Anticipated return $328,000


b. Most conservative

High liquidity $4,100,000 * 10% = $410,000
Long-term financing –4,100,000 * 8% = 328,000
Anticipated return $ 82,000


c. Moderate approach
Low liquidity    $4,100,000 * 14% = $574,000
Long-term financing   –4,100,000 * 8% = 328,000

anticipated return $246,000

Or


High liquidity $4,100,000 * 10% = $410,000
Short-term financing –4,100,000 * 6% = 246,000
anticipated return $ 164,000