ASF and Company is planning to introduce a new line of products that would involve increasing its current assets by 40 million its existing and new assets structures are

Details	Existing	New
Current assets	25	40
Fixed assets	175	175
Total assets	200	215

Its existing financial structure which includes financing certain new fixed assets but not the 15 million increases in current assets is

A/c Payable	15% of total equity
Accrued wages	10% of total equity
Long-term debts old 15%	25% of total equity
Equity	50% of total equity

According to the vice president of finance for ASF once the new products are in production and distribution a/c payable and accrued wages will increase to 10 % of original value respectively and will finance part of the increased working capital requirement. Remaining will have to be raised by borrowing on a bank credit line at 10% and borrowing on a 10-year note form an insurance company at a 12% interest rate. For the coming year ASF expects earnings before interest and taxes 15 % of total assets after the new product and tax rate 50%

Required

Company is considering three alternatives for financing working capital requirements the conservative approach would in financing with all financing with in long term debts the middle of the road approach would use 50% form long term and 50% from short term. The aggressive approach would alternative entail borrowing on the credit line. Evaluate the return on equity for each alternative .Which alternative would you recommend Why?

Answer rating: 100% (QA)

As the earning before interest and tax required at 15 of asset the proposed asset will be 215 so the ... View the full answer