Payne slase last year were anemic $1.6 million, but with improved product mix it expects to grow 25% this year. Fixed asses $1,000,000. Debt ratio 60%. Debt interest rate 8%. Policies: tight 45% of project sales, moderate 50% of sales tight up in current assets, relaxed 60% current assets saaless. Earnings before interest and taxes is expected to be 12 % of sales. Tax Rate 40%.
1. What is the expected return on equity under each current asset level?
2. The leel of expected sales is independent of current asset policy. Is this valid assumption? Why or why not?
3. How would the overall riskness of the firm vary under each policy?