Question

Assume that Atlas Sporting Goods Inc. has $940,000 in assets. If it 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 15 percent. If the firm goes with a short-term financing plan, the financing costs on the $940,000 will be 12 percent, and with a long-term financing plan the financing costs on the $940,000 will be 13 percent.

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

Answer 1

The anticipated return after financing costs with the most aggressive asset-financing mix is $56,400.

Step-by-step explanation:

To compute the anticipated return after financing costs with the most aggressive asset-financing mix, we need to compare the returns from the low-liquidity plan and the high-liquidity plan, taking into account the financing costs.

1. With the low-liquidity plan, the return is 18% on $940,000, which equals $169,200. The financing cost at 12% on $940,000 is $112,800. So, the net return after financing costs is $169,200 - $112,800 = $56,400.
2. With the high-liquidity plan, the return is 15% on $940,000, which equals $141,000. The financing cost at 13% on $940,000 is $122,200. So, the net return after financing costs is $141,000 - $122,200 = $18,800.

Therefore, the anticipated return after financing costs with the most aggressive asset-financing mix is $56,400.