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

question 97

Multiple Choice

Shahrokhi Enterprises follows a moderate current asset investment policy,but it is now considering whether to shift to a restricted or perhaps 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)4.3%
• B)4.7%
• C)5.3%
• D)5.8%

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Definitions:

Gross Profit

The financial gain obtained after subtracting the cost of goods sold from the total revenue generated from sales.

Voting Stock

Shares that give the shareholder the right to vote on company matters, such as electing directors or approving corporate policies.

Consolidations Under IFRS

The process of merging the financial results of subsidiary companies with those of the parent company according to the International Financial Reporting Standards.

Noncontrolling Interest

refers to the portion of equity in a subsidiary not held by the parent company, often reflected as a separate component of equity in the consolidated financial statements.