CFIN6
Chapter 15 Spreadsheet Problem (B)
Working Capital Policy
Use the model in File C15B to solve this problem.
Three companies—Aggressive, Moderate, and Conservative—have different working capital
management policies as implied by their names. For example, Aggressive employs only minimal current
follow:
Aggressive Moderate Conservative
Current assets $225,000 $300,000 $450,000
Fixed assets 300,000 300,000 300,000
Total assets $525,000 $600,000 $750,000
The cost of goods sold functions for the three firms are as follows:
Cost of Goods Sold = Fixed Costs + Variable Costs
Aggressive: Cost of goods sold = $300,000 + 0.70(Sales)
Moderate: Cost of goods sold = $405,000 + 0.65(Sales)
CFIN6
conditions are expected to vary as follows:
Aggressive Moderate Conservative
Strong economy $1,800,000 $1,875,000 $1,950,000
Assume that the short-term interest rate currently is 9 percent and the long-term interest rate is 12
percent.
a. Construct income statements for each company for strong, average, and weak economies.
b. Compare the returns on equity for the companies. Which company is best in a strong economy? In
an average economy? In a weak economy?