question archive Assume that Hogan Surgical Instrument Co
Assume that Hogan Surgical Instrument Co
Subject:FinancePrice:2.87 Bought7
Assume that Hogan Surgical Instrument Co. has $2,000,000 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 short-term financing plan, the financing costs on the $2,000,000 wil be 10 percent, and with a long-term fianacing plan, the financing cost on the $2,000,000 will be 12 percent.
1. Compute the anticipated return after financing cost with the most aggressive asset-financing mix.
2. Compute the anticipated return after financing cost with the most conservative asset-financing mix.
3. Compute the anticipated return after financing cost with the two moderate approaches to the asset-financing mix.
4. Would you necessarity accept the plan with the highest return after finanicing cost? Explain.
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Answer:
Hogan Surgical Instruments Company
a. Most aggressive
Low liquidity $2,000,000 * 18% = $360,000
Short-term financing –2,000,000 * 10% = 200,000
Anticipated return $160,000
b. Most conservative
High liquidity $2,000,000 * 14% = $280,000
Long-term financing –2,000,000 * 12% = 240,000
Anticipated return $ 40,000
c. Moderate approach $2,000,000 * 18% = $360,000
Low liquidity –2,000,000 * 12% = 240,000
Long-term financing $120,000
Or
High liquidity $2,000,000 * 14% = $280,000
Short-term financing –2,000,000 * 10% = 200,000 $ 80,000
d. You may not necessarily select the plan with the highest return. You must also consider the risk inherent in the plan. Of course, some firms are better able to take risks than others. The ultimate concern must be for maximizing the overall valuation of the firm through a judicious consideration of risk-return options.
