Consider again the comprehensive example involving Burlington Resources (Table 16.5). In this example, it was assumed that forecasted sales and expected EBIT, as well as the interest rates on short-term and long-term debt, were independent of the firm's working capital investment and financing policies. However, these assumptions are not always completely realistic in practice. Sales and EBIT are generally a function of the firm's inventory and receivables policies. Both of these policies, in turn, affect the firm's level of investment in working capital. Likewise, the interest rates on short-term and long-term debt are normally a function of the riskiness of the firm's debt as perceived by lenders and, hence, are affected by the firm's working capital investment and financing decisions. Recompute Burlington's rate of return on common equity under the following set of assumptions concerning sales, EBIT, and interest rates for each of the three different working capital investment and financingpolicies.

Forecasted Sales (in Millions of Dollars) s 98 100 102 Expected EBIT (in Millions of Dollars) $9.8 0.0 0.2 Interest Rate Polic Aggressive Moderate Conservative STD(%) 8.5 8.0 7.5 LTD(%) 10.5 10.0 Table 16.5 Alternative Working Capital Investment and Financing Policles for Burlington Resources (in Millions of Dollars) Moderate Moderate Investment in Conservative Relatively Large Investment in Relatively Small Investment in Current Assets Relatively Large Amount of Current Assets;Current Assets; Moderate Amount of Relatively Small Amount of Short-Term DebtortTerm Debt Short-Term Debt Current assets (CIA) Fixed assets (FIA) $ 35 $ 40 $ 45 30 Total assets (TIA) Current lablbes (STD)(CL) (interest rate,8%) Long-term labdtes (LTD) (interest rate. I0%) $ 70 $ 30 9 $ 39 20 10 35 $ 45 Total liabilities (60% ofTA) Common equity $ 42 Total labilties and common equity Forecasted sales Expected EBIT Less Interest 65 $100 10 $ 75 $100 10 $100 10 STD, 8% 0.8 0.9 33 $ 6.7 22) 38 35) 4a $ 5.7 LTD, 10% Taxable Income Less Taxes (40%) Net Income after taxes Expected rate of return on common equity Net working capital position (C/A CL) Current ratio (C/A C/L) $ 6.2 $40 134 11.3% S 35 4.5 15.4% 13.2% $ 20 1.17 2.0