Ask Question
31 January, 23:36

Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 25%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. Refer to the data for Hardwig, Inc. What's the difference in the projected ROEs under the restricted and relaxed policies

+5
Answers (1)
  1. 1 February, 03:13
    0
    1.88%

    Explanation:

    total annual sales = $3,600,000

    EBIT = $150,000

    net income = $150,000 x (1 - 25%) = $112,500

    restricted policy:

    asset turnover = 2.5

    sales = $3,600,000

    EBIT = $150,000

    net income = $112,500

    assets = $3,600,000 / 2.5 = $1,440,000

    equity = $1,440,000 x 50% = $720,000

    ROE = $112,500 / $720,000 = 15.63%

    relaxed policy:

    asset turnover = 2.2

    sales = $3,600,000

    EBIT = $150,000

    net income = $112,500

    assets = $3,600,000 / 2.2 = $1,636,364

    equity = 50% x $1,636,364 = $818,182

    ROE = $112,500 / $818,182 = 13.75%

    difference between ROEs = 15.63% - 13.75% = 1.88%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers