Question

Assume that Hogan Surgical Instruments Co. has $2,500,000 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 $2,500,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $2,500,000 will be 12 percent.

Answer 1

The the anticipated return after financing cost with the most aggressive asset financing mix is $200000.

Most aggressive

Low liquidity = $2,500,000 *18%

Low liquidity = $450,000

Short-term financing = -$2,500,000*10%

Short-term financing = -$250,000

Anticipated return = $450,000 + (-$250,000)

Anticipated return = $200,000

Most conservative

High liquidity = $2,500,000 *14%

High liquidity = $350,000

Long-term financing = –$2,500,000 * 12%

Long-term financing = -$300,000

Anticipated return = $350,000 + (-$300,000)

Anticipated return = $50,000

Moderate approach

Low liquidity = $2,500,000 *18%

Low liquidity = $450,000

Long-term financing =–$2,500,000 * 12%

Long-term financing = -$300,000

Anticipated return = $450,000 + (-$300,000)

Anticipated return = $150,000

Moderate approach

High liquidity = $2,500,000 *14%

High liquidity = $350,000

Short-term financing = -$2,500,000*10%

Short-term financing = -$250,000

Anticipated return = $350,000 + (-$250,000)

Anticipated return = $100,000

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Complete question:

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

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

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