Reference no: EM13836248
Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $5,200,000, its fixed assets turnover ratio equals 4, and its debt and common equity are each 60% of total assets. EBIT is $250,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.6. Under a relaxed policy its total assets turnover will be 2.25
a. If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?
b. What's the difference in the projected ROEs under the restricted and relaxed policies?
c. Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?
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