The HAYA company has just conducted an investigation to determine the amount of current assets for the coming year. Management estimates that sales will increase by around IDR 200 million as a result of the additional assets being made. Total fixed assets amounted to Rp100 million, and the company plans to maintain a debt-asset ratio of 60%. The interest rate for short-term debt and long-term debt is 10% and the company will maintain its capital structure permanently. There are three options that can be implemented by companies in relation to projected current asset levels: (1) a strict policy, namely the amount of current assets is only 40% of projected sales; (2) moderate policy stipulates the amount of current assets at 50% of sales; (3) the company's loose policy stipulates the amount of current assets at 60% of sales. Profit before interest and taxes is set at 15% of total sales and the corporation tax is 20%.

Questions

1). What is the amount of return on equity for each of the above alternatives?

2). In this case it is assumed that sales are not affected by the current asset policy. Are the assumptions used valid? Explain your reasons!

3). How will the company's risk be affected by the different policies above?