Mos Company is attempting to establish a current assets policy. Fixed assets are $1M and the firm intends to maintain a 50% debt to assets ratio. Mos has no current liabilities. The interest rate is 8% on all debt.
Three alternative current asset policies are under consideration: 40%, 50%, 60% on sales
Mos expects to earn 20% before interest and taxes on sales of $4M. The tax rate is 40%.
What is the ROE under each alternative?