ROE calculation
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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%
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Solution Summary
The solution calculates the difference in the projected ROEs between the restricted and relaxed current asset policies.
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c. 5.25%
Restricted Policy:
current assets = 400,000*15% = 60,000
fixed assets = 100,000
debt = ...
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