Assume Now That the Company Believes That If It Adopts

question 25

Multiple Choice

Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?

• A) 2.24%
• B) 2.46%
• C) 2.70%
• D) 2.98%
• E) 3.27%

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Definitions:

Expenses

Outflows or depletions of assets or incurrences of liabilities during a period as a result of delivering or producing goods, rendering services, or carrying out other activities linked to an entity's main operations.

Variable Costing

A costing method where variable manufacturing costs are treated as product costs, and fixed manufacturing overhead is treated as a period cost.

Net Income

The amount of earnings left after all expenses, including taxes and costs, have been subtracted from total revenue.

Fixed Overhead

Fixed overhead consists of the consistent, ongoing costs not directly tied to production levels within a business, such as rent, insurance, and salaries.