Question
Excellence Corporation follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed
Excellence Corporation 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 firms annual sales are $500,000; its fixed assets are $180,000; its target capital structure calls for 40% debt and 60% equity; its EBIT is $64,000; the interest rate on its debt is 14%; and its tax rate is 40%. With a restricted policy, current assets will be 18% of sales, while under a relaxed policy they will be 30% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
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