Question

Assume that Atlas Sporting Goods Inc. has $1,040,000 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 11 percent. If the firm goes with a short-term financing plan, the financing costs on the $1,040,000 will be 8 percent, and with a long-term financing plan the financing costs on the $1,040,000 will be 9 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

Answer:

A. Anticipated return= $62,400

B. Anticipated return= $20,800

C. Low liquidity Anticipated return=$52,000

High liquidity Anticipated return=$31,200

Explanation:

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

Anticipated return=($1,040,000*14%)-($1,040,000*8%)

Anticipated return= $145,600-$83,200

Anticipated return= $62,400

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

Anticipated return=($1,040,000*11%)-($1,040,000*9%)

Anticipated return= $114,400-$93,600

Anticipated return= $20,800

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

Anticipated Return

Low liquidity =($1,040,000*14%)-($1,040,000*9%)

Low liquidity =$145,600-$93,600

Low liquidity =$52,000

High liquidity =($1,040,000*11%)-($1,040,000*8%)

High liquidity =$114,400-$83,200

High liquidity =$31,200