Problemedwards enterprises follows a moderate current asset, Ask an Expert

Accounting

Problem:

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.

Required:

Question: What is the difference in the projected ROEs between the restricted and relaxed policies?

4.25%
4.73%
5.25%
5.78%
6.35%

Note: Show supporting computations in good form.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91172074

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