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problem: Jarred Enterprises is thinking whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are $400,000; its fixed assets are $100,000; debt & equity are each 50% of total assets. Earnings before interest and tax are $36,000, the interest rate on the company's debt is 10%, and the company's tax rate is 40%. With a restricted policy, current assets will be 15% of sales. Under a relaxed policy, current assets will be 25% of sales. Find the difference in the projected ROEs between the restricted and relaxed policies?

[A] 5.4%

[B] 1.6%

[C] 3.8%

[D] 0%; the ROEs are equal.

[E] 6.2%

Basic Finance, Finance

  • Category:- Basic Finance
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