10 Big Retailer (BR) follows a moderate current asset investment policy, but is now considering a...

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10 Big Retailer (BR) follows a moderate current asset investmentpolicy, but is now considering a change, perhaps to a restricted ormaybe to a relaxed policy. BR’s annual sales are $1,400,000; itsfixed assets are $950,000; its target capital structure calls for40% debt and 60% equity; its EBIT is $550,000; the interest rate ondebt is 8%; and its tax rate is 20%. With a restricted policy,current assets will be 20% of sales, while under a relaxed policy,current assets will be 35% of sales. What is the difference in theprojected ROEs between the restricted and relaxed policies? Enteryour answer rounded to two decimal places. Do not enter % in theanswer box. For example, if your answer is 0.12345 or 12.345% thenenter as 12.35 in the answer box.

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4.3 Ratings (633 Votes)

Restricted policy Sales 1400000 Current assets 20 of sales 280000 Fixed Assets 950000 Total Assets Fixed assets Current assets 1230000 Capital structure 40 debt 60 equity So Equity 60 of total assets 738000 Debt 40 of See Answer

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10 Big Retailer (BR) follows a moderate current asset investmentpolicy, but is now considering a change, perhaps to a restricted ormaybe to a relaxed policy. BR’s annual sales are $1,400,000; itsfixed assets are $950,000; its target capital structure calls for40% debt and 60% equity; its EBIT is $550,000; the interest rate ondebt is 8%; and its tax rate is 20%. With a restricted policy,current assets will be 20% of sales, while under a relaxed policy,current assets will be 35% of sales. What is the difference in theprojected ROEs between the restricted and relaxed policies? Enteryour answer rounded to two decimal places. Do not enter % in theanswer box. For example, if your answer is 0.12345 or 12.345% thenenter as 12.35 in the answer box.