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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Definitions:

Increases

The act or process of becoming larger or greater in size, amount, number, or degree.

Susceptible to Erosion

A condition describing materials or landscapes that are easily worn away or removed by the action of water, wind, ice, or human activities.

Bedrock

Solid rock underlying loose deposits such as soil or alluvium.

Turbulent Part

A section or aspect of a fluid flow characterized by chaotic changes in pressure and flow velocity.