1 answer

Big Retailer (BR) follows a moderate current asset investment policy, but is now considering a change,...

Question:

Big Retailer (BR) follows a moderate current asset investment policy, but is now considering a change, perhaps to a restricted or maybe to a relaxed policy. BR’s annual sales are $1,400,000; its fixed assets are $950,000; its target capital structure calls for 40% debt and 60% equity; its EBIT is $650,000; the interest rate on debt is 8%; and its tax rate is 20%. With a restricted policy, current assets will be 20% of sales, while under a relaxed policy, current assets will be 35% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.


Answers

Answes Given that annual Sale 5 51400) 0ο Ο are ixed aSSetS abe 950000 debt 401 equity E BIT 6501000 The intede Yate on debtaSset s Tetal asset 9 = Fxed a5set 5 cunt 9501000- R 80,000 2301000 Rmow that Tetal a5set S = Total Capita= 12301000 Dobt =40Net imome there fore, etubn euity equity 4881512 738000 NOW undes elaxed policy a6set =35 of. Sae535. x(40 00 0o CUent 490,00e to tal cap,E cl = 601. X 1440000 Euty=601 864000 Ysxazu i debt Intede tbte x dobt = 4 6080 CEB.ITintere Y (- Tax Yate) (650

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