Answer:
d. 2.24%
Explanation:
total annual sales = $3,600,000
fixed asset turnover = total sales / fixed assets = 4, that means that total fixed assets = $3,600,000 / 4 = $900,000
debt = 50% = $450,000
equity = 50% = $450,000
EBIT = $150,000
net income = $150,000 x (1 - 40%) = $90,000
restricted policy:
asset turnover = 2.5
sales = $3,600,000 x (1 - 15%) = $3,060,000
EBIT = $135,000
net income = $81,000
assets = $3,060,000 / 2.5 = $1,224,000
equity = $1,224,000 x 50% = $612,000
ROE = $81,000 / $612,000 = 13.24%
relaxed policy:
asset turnover = 2.2
EBIT = $150,000
net income = $90,000
assets = $3,600,000 / 2.2 = $1,636,364
equity = 50% x $1,636,364 = $818,182
ROE = $90,000 / $818,182 = 11%
difference between ROEs = 13.24% - 11% = 2.24%
