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?
Please show all work for this problem in an excel file. Thanks.
The solution explains how to calculate the ROE under restricted and relaxed policies and the difference in ROE.