Jarrett Enterprises Is Considering Whether to Pursue a Restricted or Relaxed

question 70

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) 0.0%
• B) 6.2%
• C) 5.4%
• D) 1.6%
• E) 3.8%

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