PLEASE SHOW CALCULATIONS

Barkov Corporation is contemplating the appropriate level of current assets. The decision to determine the appropriate level of current assets will be based on return on equity. Barkov is considering two alternatives; current assets would be 60 percent of sales or current assets would be 20 percent of sales. Barkovs sales are $30 million dollars. Barkov expects its EBIT to be $5,000,000. Barkovs fixed assets total $20 million. Barkov has a 60 percent debt ratio. Barkov pays 10 percent interest on its debt and Barkov has a 25 percent tax rate.

Required:

Determine the return on equity for the two policies.

Which policy has more risk? Explain.

Explain which policy you would choose.