Cisco Systems Wishes to Analyze the Joint Impact of Its

Multiple Choice

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 ____.

A) 4.18%; 3.77%
B) 11.62%; 10.48%
C) 6.97%; 6.29%
D) None of these are correct