Brakenridge Industries is considering the following two alternative working capital investment and financing policies:

Forecasted sales next year are $30 million. EBIT is projected at 25 percent of sales. Fixed assets are $30 million. The firm€™s income tax rate is 40 percent. Brakenridge desires to maintain its current capital structure, which consists of 50 percent debt and 50 percent equity. Interest rates on the company€™s short-term and long-term debt are 9 and 12 percent, respectively.
a. Determine the expected rate of return on equity capital under each of the working capital policies.
b. Which working capital policy is riskier?Explain.

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PolicyA Policy B 40% 50% A Current assets ÷ Sales 50% Short-term debt Total debt 40%