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6.) Assume that Hogan Surgical Instruments co. has \$2,000,000 in assets. If its goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high-liquidity plan, the return will be 14 percent. If the firm goes with a short-term financing plan, the financing costs on the \$2,000,000 will be 10 percent, and with a long-term financing plan, the financing costs on the \$2,000,000 will be 12 percent. (Review Table 6-11 for parts a, b, and c of this problem. which is attached in the Word document)

a. compute the anticipated return after financing costs with the most agressive asset-financing mix.

b. Compute the anticipated return after financing costs with the most conservative asset-financing mix.

c. Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix.

d. Would you necessarily accept the plan with the highest return after financing costs? Briefly explain.

#### Solution Preview

a. compute the anticipated return after financing costs with the most agressive asset-financing mix.
Low liquididty and short term financing

Assets

\$2,000,000

Return on assets @ 18% = \$360,000 =18%*2000000

Financing cost @ 10% = \$200,000 =10%*2000000

Profit= \$160,000 =360000-200000

Return in %= 8.00% =160000/2000000

b. Compute the anticipated return after financing costs with the most conservative asset-financing mix.

High liquididty and long ...

#### Solution Summary

The solution computes the anticipated return for most agressive asset-financing mix, most conservative asset-financing mix and for two moderate approaches to the asset-financing mix. Thus the anticipated returns are calculated for Low liquididty and short term financing, High liquididty and long term financing, High liquididty and short term financing, Low liquididty and long term financing.

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