Jarrett Enterprises Is Considering Whether to Pursue a Restricted or Relaxed

question 32

Multiple Choice

Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy.The firm's annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets.EBIT is $36,000, the interest rate on the firm's debt is 10 percent, and the firm's tax rate is 40 percent.With a restricted policy, current assets will be 15 percent of sales.Under a relaxed policy, current assets will be 25 percent of sales.What is the difference in the projected ROEs between the restricted and relaxed policies?

• A)0%; the ROE's are equal.
• B)6.2%
• C)5.4%
• D)1.6%
• E)3.8%

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Definitions:

Correlation Coefficient

A statistical measure that indicates the extent to which two variables fluctuate together.

Independent Variable

A variable in an experiment that is manipulated to determine its effect on the dependent variable.

Dependent Variable

The variable in an experiment that is observed and measured to see how it is influenced by the independent variable.

Correlation Coefficient

A numerical measure that indicates the extent of a linear relationship between two variables, ranging from -1 to 1.