Problem 16-13 Current Asset Usage Policy

Payne Products' sales last year were an anemic $1.6 million, but with an improved product mix it expects sales growth to be 25% this year, and Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 55%. Payne's debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted 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 10% of sales. Payne's tax rate is 35%.

What is the expected return on equity under each current asset level? Round your answers to two decimal places.

Tight policy_______________	%
Moderate policy____________	%
Relaxed policy________________	%