Question

# Hardwig Inc. Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment...

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 the tax rate is 40%. If the company follows 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?

Given Annud Sallsa\$ 3,600,000 Fixed Assests tumover ratio = 4:0 Fixed Assests turnover ratio = Sales Fixed Aucts = ) 4=\$3.600.000 Fixed Assets -> Fixed Assets = \$900,000 projected Roe minder restricted policy - Total Assets turnover = 2.5 (under restricted policy] Total Assets turnover = Sales Total Assets - 2.53 \$3,600,000 Total Assets =) Total Assets - \$1,440,000 Given Debt and common equity are 50°% each of Total assets. Therefore, Debt: \$ 720,000 Equity = \$ 720,000 Given, EBIT = \$ 150.000 Interest rate 10% of debt

Date: 4 1201 Therefore, Interest = 720000 x 10°%. \$72,000 profit before Taz: EBIT - Interest \$ 150,000 - \$ 72,000 \$ 78,000 Tax = 40% e Taxes = \$ 78,000 X 40°. = \$31,200 profit after Tax \$78,000 - \$31,200 rate \$46,800 ROE profit after Tax Equity \$ 46,200 \$720,000 6.5% projected ROE under Yelaaed policy - Total Asset texnover = 2.2 Cunder related policy) =) Total Asset turnover = Sales Total Assets = 2:2= \$3,600,000 Total Assets Total Assets : \$3,500,000 2.2 = \$4636,364 (sounded of t.

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