Answer:
1.88%
Explanation:
total annual sales = $3,600,000
EBIT = $150,000
net income = $150,000 x (1 - 25%) = $112,500
restricted policy:
asset turnover = 2.5
sales = $3,600,000
EBIT = $150,000
net income = $112,500
assets = $3,600,000 / 2.5 = $1,440,000
equity = $1,440,000 x 50% = $720,000
ROE = $112,500 / $720,000 = 15.63%
relaxed policy:
asset turnover = 2.2
sales = $3,600,000
EBIT = $150,000
net income = $112,500
assets = $3,600,000 / 2.2 = $1,636,364
equity = 50% x $1,636,364 = $818,182
ROE = $112,500 / $818,182 = 13.75%
difference between ROEs = 15.63% - 13.75% = 1.88%