Callison Airlines Is Deciding Whether to Pursue a Restricted or Relaxed

Multiple Choice

Callison Airlines is deciding whether to pursue a restricted or relaxed working capital investment policy. Callison's annual sales are expected to total $3.6 million, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50 percent of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10 percent, and the firm's tax rate is 40 percent. 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 is the difference in the projected ROEs between the restricted and relaxed policies?

A) 2.24%
B) 1.50%
C) 1.00%
D) 0.50%
E) 0.33%