Edwards Enterprises Follows a Moderate Current Asset Investment Policy,but It

question 102

Multiple Choice

Edwards Enterprises follows a moderate current asset investment policy,but it is now considering a change,perhaps to a restricted or maybe to a relaxed policy.The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%.With a restricted policy,current assets will be 15% of sales,while under a relaxed policy they will be 25% of sales.What is the difference in the projected ROEs between the restricted and relaxed policies.

• A)4.25%
• B)4.73%
• C)5.25%
• D)5.78%
• E)6.35%

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Definitions:

Months

Units of time, typically made of 28 to 31 days, used to measure the duration of a year.

Hands

The end part of a person's arm beyond the wrist, consisting of the palm, fingers, and thumb, used for grasping or holding.

Growth Spurts

Rapid periods of physical growth in height and weight that typically occur during adolescence.

Dendrites

The branched projections of a neuron that act to conduct the electrochemical stimulation received from other neural cells to the body, or soma, of the neuron.