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    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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    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.

    $2.19