Buchholz Corporation follows a moderate current asset investment policy, but is now considering a change, perhaps...

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Buchholz Corporation follows a moderate current asset investmentpolicy, but is now considering a change, perhaps to a restricted ormaybe to a relaxed policy. The firm's annual sales are $400,000;its fixed assets are $100,000; its target capital structure callsfor 50% debt and 50% equity; its EBIT is $40,000; the interest rateon debt is 8%; and its tax rate is 25%. With a restricted policy,current assets will be 15% of sales, while under a relaxed policy,current assets will be 25% 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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3.9 Ratings (622 Votes)

Restricted policy Sales 400000 Current assets 15 of sales 60000 Fixed Assets 100000 Total Assets Fixed assets Current assetes 160000 Capital structure 50 debt 50 equity So Equity 80000 Debt 50 of See Answer

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Buchholz Corporation follows a moderate current asset investmentpolicy, but is now considering a change, perhaps to a restricted ormaybe to a relaxed policy. The firm's annual sales are $400,000;its fixed assets are $100,000; its target capital structure callsfor 50% debt and 50% equity; its EBIT is $40,000; the interest rateon debt is 8%; and its tax rate is 25%. With a restricted policy,current assets will be 15% of sales, while under a relaxed policy,current assets will be 25% 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.