Voslorus Ltd is considering whether to pursue an aggressive or conservative current asset investment policy. The firm's annual sales are expected to total R3 600 000, its fixed assets turnover ratio equals 4.0, and its debt and ordinary share equity are each 50% of total assets. EBIT is R150 000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows an aggressive policy, its total assets turnover will be 2.5. Under a conservative policy its total assets turnover will be 2.2.

Question 9

If the firm adopts an aggressive policy, how much lower will its interest expense be than under the conservative policy?




1.
R8 418.



2.
R8 861.



3.
R9 327.



4.
R9 818.

What's the difference in the projected return on equities’ (ROEs) under the aggressive and conservative policies?

Assume that the company believes that if it adopts an aggressive policy, its sales will fall by 15% and the EBIT by 10%. However, its total assets turnover, debt ratio, interest rate and tax rate will all remain the same. In this situation, what will be the difference between the projected ROEs under the aggressive and conservative policies?