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Determine the return on equity for the policy 1

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Reference no: EM132509855

Robinson Corporation is deciding whether to pursue an aggressive or conservative working capital investment policy. The following information is available:

  • The firm's annual sales are expected to total $10,000,000.
  • Its fixed assets will be $5,000,000.
  • Its debt and common equity are each 50% of total assets.
  • EBIT will be $600,000.
  • The interest rate of the firm's debt is 8%.
  • The tax rate is 25%.
  • If the company follows Policy 1, its current assets will be $1,200,000.
  • Under Policy 2, its current assets will be $1,000,000.

a) Determine the return on equity for the Policy 1 and the Policy 2.

b) Which policy is the more risky one? Explain.

Reference no: EM132509855

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