Working Capital Policy Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year.
Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $3 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne's debt interest rate is currently 9%.
You are to evaluate three different current asset policies:
(1) a tight policy in which current assets are 45% of projected sales,
(2) a moderate policy with 50% of sales tied up in current assets, and
(3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes is expected to be 12% of sales. Payne's tax rate is 40%.
What is the expected return on equity under each current asset level? Round your answers to two decimal places.