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Question - Example on the working capital management - Your company wants to establish its current assets policy. Fixed assets are $ 1 million, the company has no operating current liabilities. Earnings are expected to be 12% before interest and taxes, on sales of $ 2 million. The marginal tax rate is 30%, the interest rate is 8% on all debt and a 0.40 leverage ratio should be maintained.
Three alternatives regarding the projected current asset level are available:
1. An aggressive policy, requiring current assets of only 40% of projected sales
2. A moderate policy of 50% of sales in current assets
3. A conservative policy, requiring current assets of 60% of sales.
Required -
1. What is the expected return on equity under each asset policy?
2. Explain how would the overall riskiness of the company differ under each policy?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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CAPM and Venture Capital
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