Question 238 pts | Business & Finance homework help

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Multi-Part 23:

Carolina Electronics is deciding whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are expected to total \$1.4M, its fixed assets turnover ratio equals 3.5, and its debt is 40% of total assets. EBIT is \$200,000, the interest rate on the firm’s debt is 12%, and the tax rate is 35%. If the company follows a restricted policy, its total assets turnover will be 2.8. Under a relaxed policy its total assets turnover will be 2.3.

Refer to Multi-Part 23. If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy

\$4,589

\$5,217

\$6,622

\$7,818

\$10,017

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Multi-Part 23:

Carolina Electronics is deciding whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are expected to total \$1.4M, its fixed assets turnover ratio equals 3.5, and its debt is 40% of total assets. EBIT is \$200,000, the interest rate on the firm’s debt is 12%, and the tax rate is 35%. If the company follows a restricted policy, its total assets turnover will be 2.8. Under a relaxed policy its total assets turnover will be 2.3.

Refer to Multi-Part 23. What’s the difference in the projected ROEs under the restricted and relaxed policies?

1.20%

5.03%

7.74%

8.16%

9.79%

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Multi-Part 23:

Carolina Electronics is deciding whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are expected to total \$1.4M, its fixed assets turnover ratio equals 3.5, and its debt is 40% of total assets. EBIT is \$200,000, the interest rate on the firm’s debt is 12%, and the tax rate is 35%. If the company follows a restricted policy, its total assets turnover will be 2.8. Under a relaxed policy its total assets turnover will be 2.3.

Refer to Multi-Part 23. Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 20% and EBIT will fall by 25%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what’s the difference between the projected ROEs under the restricted and relaxed policies?

2.24%

3.46%

5.03%

6.24%

7.27%

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