Simmons Industries Is Considering Two Alternative Working Capital Investment and Financing

question 63

Multiple Choice

Simmons Industries is considering two alternative working capital investment and financing policies. Policy A requires the firm to keep its current assets at 60% of forecasted sales and to finance 75% of its debt requirements with long-term debt (and 25% with short-term debt) . Policy B, on the other hand, requires the firm to keep current assets at 40% of forecasted sales and to finance 50% of its debt requirements with long-term debt (and 50% with short-term debt) . Forecasted sales for next year are $20 million. Earnings before interest and taxes are projected to be 20% of sales. The firm's corporate income tax rate is 40%. Its fixed assets total $10 million. The firm desires to maintain its existing capital structure that consists of 50% debt (both long-term and short-term) and 50% equity. Interest rates on short- and long-term debt are 8% and 10%, respectively. ​
Determine the expected rate of return on equity next year for Simmons Industries under each of the working capital policies.

• A) 26.9%; 30.4%
• B) 21%; 26.7%
• C) 8.1%; 9.1%
• D) 16.1%; 21.3%

---

Definitions:

Relaxation

A state of reduced tension and stress, often achieved through specific techniques or activities.

Exercise

Engaging in planned, structured, and repetitive physical activities aimed at enhancing or maintaining one's physical condition and overall wellness.

Births

The act or process of bearing or bringing forth offspring from the womb.

Attended

This term can refer to being present at an event or giving attention to a specific task or detail.