Buchholz Corporation Follows a Moderate Current Asset Investment Policy,but It

question 84

Multiple Choice

Buchholz Corporation 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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