Question

Assume that Atlas Sporting Goods Inc. has $1,050,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan the return will be 12 percent. If the firm goes with a short-term financing plan, the financing costs on the $1,050,000 will be 9 percent, and with a long-term financing plan, the financing costs on the $1,050,000 will be 10 percent.

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

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

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

d. If the firm used the most aggressive asset-financing mix described in part a and had the anticipated return you computed for part a, what would earnings per share be if the tax rate on the anticipated return was 30 percent and there were 20,000 shares outstanding? (Round your answer to 2 decimal places.)
  

e-1. Now assume the most conservative asset-financing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? (Round your answer to 2 decimal places.)
  

e-2. Would the conservative mix have higher or lower earnings per share than the aggressive mix?
  

	Lower
	Higher

Answer 1

• A- most aggressive strategy shall be low liquidity and short term financing plan. Therefore the anticipated returns shall be 15%-9%= 6% x1050000= 63000.
• B- most Conservative strategy shall be high liquidity and long-term financing plan. Therefore the anticipated returns shall be 12%-10%=2%x1050000=21000.
• C- The anticipated returns for the two moderate strategies shall be as follows:

1. Low liquidity and long-term financing i.e, 15%-10%=5%x1050000=52500.

2. High liquidity and short-term financing i.e, 12%-9%=3%x1050000=31500.

• ​Earnings per share =

D- earnings per share = == 2.21

E-1- earnings per share = = =2.94

E-2- I find this comparison vague because in both the cases no. Of outstanding shares are different. Still conservative strategy has a higher EPS than aggressive strategy.