Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?
A) 2.24%
B) 2.46%
C) 2.70%
D) 2.98%
E) 3.27%

Question

Quizplus · Accepted Answer

Explanation:The ROE under the restricted policy is:ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets / Equity)= (0.9 * EBIT / Sales) * (Sales / Total Assets) * (Total Assets / Equity)= (0.9 * 0.9 * EBIT / Sales) * (Sales / Total Assets) * (Total Assets / Equity)= 0.81 * ROE under the relaxed policyTherefore, the difference between the projected ROEs under the restricted and relaxed policies is:ROE under the relaxed policy - ROE under the restricted policy= ROE under the relaxed policy - 0.81 * ROE under the relaxed policy= 0.19 * ROE under the relaxed policy= 0.19 * 12%= 2.28%The closest answer choice is A) 2.24%.

Assume Now That the Company Believes That If It Adopts