Sugar Corporation is considering what level of current assets to maintain, as well as whether to use more or less long-term debt, as opposed to short-term debt. Factors to consider: Fixed assets -...

Sugar Corporation is considering what level of current assets to maintain, as well as whether to use more or less long-term debt, as opposed to short-term debt.

Factors to consider:

• Fixed assets - $6,000,000


• Earnings before interest and taxes - $ 800,000


• Tax rate – 30 percent


• Optimal capital structure – 60 percent equity, 40 percent debt


• Interest on short-term debt – 5 percent


• Interest on long-term debt – 8 percent


• Current asset level possibilities. Aggressive - $1,000,000 Conservative - $1,500,000.


• Level of short-term debt possibilities. Aggressive – 70 percent of total debt.  Conservative – 40 percent of total debt.

Required:

1. 
   Calculate the return on equity for the aggressive and conservative plans.
   


2. 
   Discuss which plan you would choose.