Hardwig Inc.
Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and thetax rate is 25%. If thecompanyfollows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2.
Refer to the data for Hardwig, Inc. What's the difference in the projected ROEs under the restricted and relaxed policies?
A. 1.50%
B. 1.88%
C. 2.25%
D. 2.70%
E. 3.24%
Answer: B
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