Question: Assume that Hogan Surgical Instruments Co. has $2,000,000 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 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 6-11on page 178 for parts a, b, and c of this problem.)
a. Compute the anticipated return after financing costs with the most aggressive 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.