whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total P3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is P150,000, 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.
whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total P3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is P150,000, 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Perseverance Corporation is deciding whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total P3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is P150,000, 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.
What's the difference in the projected ROES under the restricted and relaxed policies? [Round off to one decimal place.)
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