Callison Airlines Is Deciding Whether to Pursue a Restricted or Relaxed

question 120

Multiple Choice

Callison Airlines is deciding whether to pursue a restricted or relaxed working capital investment policy. Callison's annual sales are expected to total $3.6 million, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50 percent of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10 percent, and the firm's tax rate is 40 percent. If the company follows a restricted policy, its total assets turnover will be 2.5.
Under a relaxed policy, its total assets turnover will be 2.2.
-What is the difference in the projected ROEs between the restricted and relaxed policies?

• A) 2.24%
• B) 1.50%
• C) 1.00%
• D) 0.50%
• E) 0.33%

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Definitions:

Seeing Stars

A colloquial term often used to describe the visual phenomenon experienced after a sudden impact to the head, characterized by seeing flashing lights.

Parietal Cortex

A region of the brain located in the parietal lobe, involved in processing sensory information from various parts of the body, understanding spatial orientation, and managing language and calculation.

Temporal Lobes

Regions of the brain located on either side of the brain, involved in processing auditory information and encoding memory.

Prefrontal Cortex

The front part of the frontal lobe, involved in complex behaviors such as planning, decision making, and moderating social behavior.