The Anderson Corporation (an all-equity-financed firm) has a sales level of $280,000 with a 10 percent profit margin before interest and taxes. To generate this sales volume, the firm maintains a fixed-asset investment of $100,000. Currently, the firm maintains $50,000 in current assets.
a. Determine the total asset turnover for the firm and compute the rate of return on total assets before taxes.
b. Compute the before-tax rate of return on assets at different levels of current assets starting with $10,000 and increasing in $15,000 increments to $100,000.
c. What implicit assumption is being made about sales in Part (b)? Appraise the significance of this assumption along with the policy to choose the level of current assets that will maximize the return on total assets as computed in Part (b).