Question 1

(A) Columbus, Inc. is really making it big in Wisconsin. Their

sales predictions for next year are $10 million, and fixed assets will grow to \$2,000,000 Projected earnings before interest and taxes are 25% of sales with a 40% tax rate. Columbus policies in the past have been carefully monitored. They have maintained an interest rate of 12% on all short- and long-term loans, which totals 36% of all assets. Columbus Inc. is now struggling over how their investment in current assets is affecting the return on common shareholders' equity.

What is the company's return on equity based upon a working capital strategy calling for a current asset-to-sales ratio of 40\% ? (15 marks)

Part B (7 marks)

Discuss the risk-return relationship involved in managing the firm's working capital? ( 7marks)

Part C(3 marks )

What are some of the risk-return trade-offs associated with adopting a more liberal trade credit policy ?(3 marks)