Question $3(25$ marks$)$

NEAT Airlines is deciding whether to pursue a restricted or relaxed current assets investment policy. NEAT's annual sales are expected to total $$4$ million, its fixed assets tumover ratio equals $4\mathrm{.}0,$ and its debt and common equity are each $50$ percent of total assets. EBIT is $$180,000,$ the interest rate on the firm's debt is $10$ percent, and the firm's tax rate is $40$ percent. If the company follows a restricted policy, its total assets turnover will be $2\mathrm{.}5.$ Under a relaxed policy, its total assets tumover will be $3.$

Required:

Find the expected rate of return$($ROE$)$ on both the restricted policy and the relaxed policy.

$(25$ marks$)$

$($Marks will be given for the balance sheet extract & income statement extract$)$

Note: Fixed asset turnover$-$net sales$/$fixed asset and total asset turnover$-$net sales$/$total asseL.