Reynolds Equipment Company is investigating the use of various combinations of short-term and long-term debt in financing its assets. Assume that the company has decided to employ $30 million in current assets, along with $35 million in fixed assets, in its operations next year. Given this level of current assets, anticipated sales and EBIT for next year are $60 million and $6 million, respectively. The company's income tax rate is 40 percent. Stockholders' equity will be used to finance $40 million of its assets, with the remainder being financed by short-term and long-term debt. Reynolds is considering implementing one of the following financing policies:

a. Determine the following for each of the financing policies:
i. Expected rate of return on stockholders' equity
ii. Net working capital position
iii. Current ratio
b. Evaluate the profitability versus risk trade-offs of these threepolicies.

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Amount of Short-Term Debt (in Millions of Dollars) Interest Rate LTD(%) Financing Policy Aggressive (large amount of STD(%) $24 short-term debt) short-term debt short-term debt) 8.5 5.5 8.0 5.0 7.5 4.5 Moderate (moderate amount of 18 Conservative (small amount of 12