# ROE calculation

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?

Select one:

a. 4.25%

b. 4.73%

c. 5.25%

d. 5.78%

e. 6.35%

https://brainmass.com/business/finance/calculating-roi-600207

#### Solution Preview

c. 5.25%

Restricted Policy:

current assets = 400,000*15% = 60,000

fixed assets = 100,000

debt = ...

#### Solution Summary

The solution calculates the difference in the projected ROEs between the restricted and relaxed current asset policies.