The information provided below applies to the next three questions. Lugubrious L
ID: 2817885 • Letter: T
Question
The information provided below applies to the next three questions. Lugubrious Ltd is considering whether to pursue an aggressive or conservative current as investment policy. The firm's annual sales are expected to total R3 600 000, its fixe 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 asset turnover will be 2.5. Under a conservative policy, its total asset turnover will be 2.2. set QUESTION 5 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 QUESTION6 What is the difference in the projected return on equities (ROEs) under the aggressive and conservative policies? 1. 1.20% 2. 1.50% 3. 1.80% 4. 2.16% QUESTION 7 e that the company believes that if it adopts an aggressive policy, its sales will fall b Assum 15% and the EBIT by 10 rate will all r ROEs under the aggressive and conservative policies? %. However, its total assetstumover, debt ratio, interest rate and tax emain the same. In this situation, what will be the difference between the projected 1. 2.24% 2. 2.46% 3. 2.70% 4. 2.98%Explanation / Answer
Question - 5 ......... Select - Option - 4 R 9 818
Total assets ( Aggressive ) = 3600,000 / 2.5 = 1440,000
Debt = 50% of 1440,000 = 720,000
Interest = 720,000 * 0.10 = 72,000
But Interest under ( Conservative policy ) = 3600,000 / 2.2 * 50% * 10 = 81818
Thus saving with aggrresive policy = 81818 - 72000 = 9818
Question - 6 ............. Select - Option - 2 1.5%
ROE ( Aggresive ) = ( EBIT - Interest ) ( 1 - Tax rate ) / Equity * 100
= ( 150,000 - 72000) (0.60) / 720,000 * 100
= 6.50 %
ROE ( Conservative ) = ( 150,000 - 81818) (0.60) / 818182 * 100 = 5%
Thus the difference in ROE = 6.5 - 5 = 1.5 %
Question - 7 ........... select - Option - 1 ......... 2.24 %
EBIT = 150,000 - 10% of 150,000 = 135,000
Interest = 3600,000 * 0.85 / 2.5 * 0.50 * 0.10 = 61200
ROE = ( 135000 - 61200 ) ( 0.60) / 612000 * 100 = 7.24 %
So ....... the difference = 7.24 - 5 = 2.24%
Kindly rate the answer ........ all the best
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