Big Retailer (BR) follows a moderate current asset investmentpolicy, but is now considering a change, perhaps to a restricted ormaybe to a relaxed policy. BR’s annual sales are $1,400,000; itsfixed assets are $950,000; its target capital structure calls for40% debt and 60% equity; its EBIT is $500,000; the interest rate ondebt is 8%; and its tax rate is 20%. With a restricted policy,current assets will be 20% of sales, while under a relaxed policy,current assets will be 35% of sales. What is the difference in theprojected ROEs between the restricted and relaxed policies?
