Jarrett Enterprises Is Considering Whether to Pursue a Restricted or Relaxed

Multiple Choice

Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy.The firm's annual sales are R400,000; its fixed assets are R100,000; debt and equity are each 50 percent of total assets.EBIT is R36,000, the interest rate on the firm's debt is 10 percent, and the firm's tax rate is 40 percent.With a restricted policy, current assets will be 15 percent of sales.Under a relaxed policy, current assets will be 25 percent of sales.What is the difference in the projected ROEs between the restricted and relaxed policies?

A) 0%; the ROE's are equal.
B) 6.2%
C) 5.4%
D) 1.6%
E) 3.8%