Question

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?

Answer 1

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.