Question

Assume that Hogan Surgical Instruments Co. has $3,500,000 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 $3,500,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $3,500,000 will be 12 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.
low liquidity -

high liquidity-

Answer 1