Bulldogs Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P500,000; its fixed assets are P200,000; debt and equity are each 50% of total assets. EBIT is P40,000, the interest rate on the firm’s debt is 10%, and the firm’s tax rate is 25%. Current assets will be 10% of sales with a restricted policy. Under a relaxed policy, current assets will be 20% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies? 5.40% 3.57% 4.00% 3.20%
Bulldogs Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P500,000; its fixed assets are P200,000; debt and equity are each 50% of total assets. EBIT is P40,000, the interest rate on the firm’s debt is 10%, and the firm’s tax rate is 25%. Current assets will be 10% of sales with a restricted policy. Under a relaxed policy, current assets will be 20% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies? 5.40% 3.57% 4.00% 3.20%
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 9P
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Bulldogs Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P500,000; its fixed assets are P200,000; debt and equity are each 50% of total assets. EBIT is P40,000, the interest rate on the firm’s debt is 10%, and the firm’s tax rate is 25%. Current assets will be 10% of sales with a restricted policy. Under a relaxed policy, current assets will be 20% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
5.40%
3.57%
4.00%
3.20%
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