Question

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.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?

Answer 1

The between the projected roes under the restricted and relaxed policies is 1.50%.

What are restricted and relaxed current asset investment policy?

In restricted policies, the estimation of current assets is done very aggressively without taking into account any contingencies and provisions for any unforeseen event in order to achieve targeted revenue. After making a decision, these policies are strictly enforced throughout the company without allowing for any exceptions.

In relaxed policy, the evaluation of current assets is made after carefully taking into account unknown occurrences like seasonal variations, a sudden change in the level of activities or sales, etc. in order to achieve the projected revenue. After the plausible projections, a safety net to account for unforeseen events is left to reduce risk as much as possible.

To learn more about current assets

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