Question

Assume that Hogan Surgical Instruments Co. has $3,800,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 16 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 $3,800,000 will be 8 percent, and with a long-term financing plan, the financing costs on the $3,800,000 will be 10 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.

Anticippated 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

a). Most Aggressive

Low Liquidity	$3,800,000 x 0.16	$608,000
Short-Term Financing	$3,800,000 x 0.08	(304,000)
Anticipated Return		$304,000

b). Most Conservative

High Liquidity	$3,800,000 x 0.12	$456,000
Long-Term Financing	$3,800,000 x 0.10	(380,000)
Anticipated Return		$ 76,000

c). Moderate Approach

Low Liquidity:

Low Liquidity	$3,800,000 x 0.16	$608,000
Long-Term Financing	$3,800,000 x 0.10	(380,000)
Anticipated Return		$228,000

High Liquidity:

High Liquidity	$3,800,000 x 0.12	$456,000
Short-Term Financing	$3,800,000 x 0.08	(304,000)
Anticipated Return		$152,000