(A) Zzzz Worst Company currently has total assets of $3.2 million, of which current assets comprise $0.2 million. Sales are $10 million annually, and the before-tax net profit margin (the firm currently has no interest-bearing debt) is 12 percent. Given renewed fears of potential cash insolvency, an overly strict credit policy, and imminent stock outs, the company is considering higher levels of current assets as a buffer against adversity. Specifically, levels of $0.5 million and $0.8 million are being considered instead of the $0.2 million presently held. Any additions to current assets would be financed with new equity capital.
a. Determine the total asset turnover, before-tax return on investment, and before-tax net profit margin under the three alternative levels of current assets.
b. If the new additions to current assets were financed with long-term debt at 15 percent interest, what would be the before-tax interest “cost” of the two new policies?
(B) What is the distinction between the money market and the capital market? Is the distinction
real or artificial?

Answer rating: 100% (QA)

Step 1 Asset turnover ratio helps an analyst in measuring the value of sales related to the assets o... View the full answer