Buchholz Corporation Follows a Moderate Current Asset Investment Policy, but It

question 81

Multiple Choice

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 25%.With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales.What is the difference in the projected ROEs between the restricted and relaxed policies?

• A) 5.32%
• B) 5.91%
• C) 6.56%
• D) 7.22%
• E) 7.94%

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