Sugar Corporation is considering what level of current assets to maintain, as well as whether to use more or less long-term debt, as opposed to short-term debt. Factors to consider: Fixed assets - $6,000,000 Earnings before interest and taxes - $ 800,000 Tax rate – 30 percent Optimal capital structure – 60 percent equity, 40 percent debt Interest on short-term debt – 5 percent Interest on long-term debt – 8 percent Current asset level possibilities. Aggressive - $1,000,000 Conservative - $1,500,000. Level of short-term debt possibilities. Aggressive – 70 percent of total debt. Conservative – 40 percent of total debt. Required: Calculate the return on equity for the aggressive and conservative plans. Discuss which plan you would choose.
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
Sugar Corporation is considering what level of current assets to maintain, as well as whether to use more or less long-term debt, as opposed to short-term debt.
Factors to consider:
- Fixed assets - $6,000,000
- Earnings before interest and taxes - $ 800,000
- Tax rate – 30 percent
- Optimal capital structure – 60 percent equity, 40 percent debt
- Interest on short-term debt – 5 percent
- Interest on long-term debt – 8 percent
- Current asset level possibilities. Aggressive - $1,000,000 Conservative - $1,500,000.
- Level of short-term debt possibilities. Aggressive – 70 percent of total debt. Conservative – 40 percent of total debt.
Required:
- Calculate the
return on equity for the aggressive and conservative plans. - Discuss which plan you would choose.
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