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Rate of return, working capital, current ratio

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Reynolds Equipment financing policies: rate of return, working capital, current ratio

Reynolds Equipment Company is investing the use of various combinations of short-term and long-term debt in financing its assets. Assume that the company has decided to employ $30 million in current assets, along with $35 million in fixed assets, in its operations next year. Given that this level of current assets, anticipated sales and EBIT for next year are $60 million and $6 million, respectively. The company's income tax rate is 40 percent. Stockholder's equity will be used to finance $40 million of its assets, with the remainder being financed by short-term and long-term debt. Reynolds is considering implementing one of the following financing policies: ...
(please see the attached file).

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Solution Summary

This solution helps in computing the rate of return, the working capital, and the current ratio for the given company.

Solution Preview

Please check the attached Excel file for format and formulas.

1) Expected rate of return on stockholders' equity

Total funds to be raised from debt= Additional funds requirement in Assets- Equity
=65-40
25

Calculate Net profit: ...

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