Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy PDF

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1. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P400,000; its fixed assets are P100,000; debt and equity are each 50 percent of total assets. EBIT is P36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?

Restricted

Rela

Fixed Assets Current Assets (Restricted 400,000*15%) (Relaxed 400,000*25%)

100,000

100,000

60,000

100,000

Total Asset

160,000

200,000

Debt

80,000

100,000

Equity

80,000

100,000

Earnings before Intertest and Tax

36,000

36,000

Interest (10%)

8,000

10,000

Earnings before Tax

28,000

26,000

Tax Rate (40%)

11,200

10,400

Net Income

16,800

15,600

Equity ROE

80,000

Difference ROE between the restricted and relaxed

100,000 21% 5.4%...