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Difference between the projected ROEs

Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are $400,000; Fixed assets are $100,000; debt and equity are each 50% of total assets. EBIT is $36,000, the interest rate on the firms debt is 10% and the firms 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. What is the difference between the projected ROEs between the restricted and relaxed policies?

A) 0.0%
B) 6.2%
C) 5.4%
D) 1.6%
E) 3.8%

Please show all work for this problem in an excel file. Thanks.

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Solution Summary

The solution explains how to calculate the ROE under restricted and relaxed policies and the difference in ROE.

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