Problem:
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.
Required:
Question: What is the difference in the projected ROEs between the restricted and relaxed policies?
- 4.25%
- 4.73%
- 5.25%
- 5.78%
- 6.35%
Note: Show supporting computations in good form.