Cisco Systems wishes to analyze the joint impact of its working capital investment and financing policies on shareholder return. The company has $24 million in fixed assets. Cisco wishes to maintain a debt ratio of 40%. The company's tax rate is also 40%. The following information was developed for the two policies under consideration (dollars in millions): $$\begin{array} { l l l }
& \text { Aggressive } & \text { Conservative } \
\text { Investment in current assets } & \$ 28 & \$ 34 \
\text { Amount of short term debt } & \$ 16 & \$ 10 \
\text { EBIT } & \$ 5.4 & \$ 5.8 \
\text { Interest rate-LTD } ( \% ) & 12.0 & 11.0 \
\text { Interest rate-STD } ( \% ) & 7.5 & 7.0
\end{array}$$ ? For the aggressive approach, Cisco's ROE is ____ and for the conservative approach the ROE is ____.

Question

Cisco Systems wishes to analyze the joint impact of its working capital investment and financing policies on shareholder return. The company has $24 million in fixed assets. Cisco wishes to maintain a debt ratio of 40%. The company's tax rate is also 40%. The following information was developed for the two policies under consideration (dollars in millions): $$\begin{array} { l l l } 
& \text { Aggressive } & \text { Conservative } \
\text { Investment in current assets } & \$ 28 & \$ 34 \
\text { Amount of short term debt } & \$ 16 & \$ 10 \
\text { EBIT } & \$ 5.4 & \$ 5.8 \
\text { Interest rate-LTD } ( \% ) & 12.0 & 11.0 \
\text { Interest rate-STD } ( \% ) & 7.5 & 7.0
\end{array}$$ ? For the aggressive approach, Cisco's ROE is ____ and for the conservative approach the ROE is ____.

Quizplus · Accepted Answer

To calculate ROE, we need to find Net Income and Equity. For both approaches, calculate interest, taxes, and then net income. Finally, calculate ROE using Net Income/Equity.

Cisco Systems Wishes to Analyze the Joint Impact of Its