Sandy Corporation is contemplating the appropriate level of current assets. The decision to determine the appropriate level of current assets will be based on return on equity. Sandy is considering two alternatives; current assets would be 60 percent of sales or current assets would be 25 percent of sales. Sandys sales are $200 million dollars. Sandy expects its EBIT to be $20,000,000. Sandys fixed assets total $60 million. Sandy has a 40 percent debt ratio. Sandy pays 16 percent interest on its debt and Sandy has a 20 percent tax rate.

Required:

1. Determine the return on equity for the two policies.
2. Which policy has more risk? Explain.
3. Explain which policy you would chose.