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What is the expected return on equity

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Question - Payne Products's sales last year were an anemic $1.6 million, but with an improved product mix it expects sales growth to be 25% this year, and Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $3 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne's debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a tight policy requiring current assets of only 45% of projected sales, (2) a moderate policy of 50% of sales in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes is expected to be 13% of sales. Payne's tax rate is 35%.

Required - What is the expected return on equity under each current asset level?

Tight policy _____%

Moderate policy_____ %

Relaxed policy_____ %

Reference no: EM132479896

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