Edwards Enterprises follows a moderate current asset investment policy,but it is now considering a change,perhaps to a restricted or maybe to a relaxed policy.The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%.With a restricted policy,current assets will be 15% of sales,while under a relaxed policy they will be 25% of sales.What is the difference in the projected ROEs between the restricted and relaxed policies.
A)4.25%
B)4.73%
C)5.25%
D)5.78%
E)6.35%

Question

Quizplus · Accepted Answer

Under the restricted policy, current assets are 15% of sales, and under the relaxed policy, they are 25% of sales. The difference in ROE is calculated by determining the net income and equity under each policy and then finding the difference in ROE. The calculations show that the difference in the projected ROEs between the restricted and relaxed policies is 5.25%.

Edwards Enterprises Follows a Moderate Current Asset Investment Policy,but It