Buchholz Corporation follows a moderate current asset investment policy, but it is now considering a...
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Buchholz 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 firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% 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?
a. 3.25%
b. 5.18%
c. 3.73%
d. 4.24%
Buchholz 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 firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% 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?
| a. | 3.25% | |
| b. | 5.18% | |
| c. | 3.73% | |
| d. | 4.24% |
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