Daggy Corporation Has the Following Simplified Balance Sheet: Cash

question 49

Multiple Choice

Daggy Corporation has the following simplified balance sheet: Cash $ 25,000 Current liabilities $200,000
Inventory 190,000
Accounts receivable 125,000 Long-term debt 300,000
Net fixed assets 360,000 Common equity 200,000
Total $700,000 Total $700,000
The company has been advised that their credit policy is too generous and that they should reduce their days' sales outstanding to 36.5 days (assume a 365-day year) . The increase in cash resulting from the decrease in accounts receivable will be used to reduce the company's long-term debt. The interest rate on long-term debt is 10 percent and the company's tax rate is 30 percent. The tighter credit policy is expected to reduce the company's sales to $750,000 and result in EBIT of $70,000. What is the company's expected ROE after the change in credit policy?

• A) 14.88%
• B) 16.63%
• C) 15.75%
• D) 18.38%
• E) 16.25%

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