a) Current Asset Policy of 40%

Sales= $3 million

Current Assets= 40%*$3 million= $1200000

Fixed Assets= $600,000

Debt/Assets= 0.50

Debt= 0.50*($1200000+600000) = $900,000

Since no current liabilities therefore we can calculate interest

expense on total debt= 0.10*$900000= $90000

Earnings before Interest and Tax= 15% of Sales= 0.15*3 million=

$450,000

Interest expense= $90,000

Earnings before interest= $450,000-$90,000= $360,000

Federal tax rate= 40%

Earnings after Tax or Net Income= $360,000(1-0.40)= $216,000

Return on Equity= Net Income / Equity

Equity= Total Assets- Total Liabilities= ($1200000+$600000)-$900,000=

$900,000

Return On equity= $216,000/$900,000= 0.24

b) Current Asset Policy of 50%

Sales= $3 million

Current Assets= 50%*$3 million= $1500000

Fixed Assets= $600,000

Debt/Assets= 0.50
Debt= 0.50*($1500000+600000)= $1050000

Since no current liabilities therefore we can calculate interest

expense on total debt= 0.10*$1050000= $105000

Earnings before Interest and Tax= 15% of Sales= 0.15*3 million=

$450,000

Interest expense= $105,000

Earnings before interest= $450,000-$105,000= $345,000

Federal tax rate= 40%

Earnings after Tax or Net Income= $345,000(1-0.40)= $207,000

Return on Equity= Net Income / Equity

Equity= Total Assets- Total Liabilities= ($1500000+$600000)-

$1050000= $1050000

Return On equity= $207,000/$1050000= 0.197

c) Current Asset Policy of 60%

Sales= $3 million

Current Assets= 60%*$3 million= $1800000

Fixed Assets= $600,000

Debt/Assets= 0.50

Debt= 0.50*($1800000+600000)= $1200000

Since no current liabilities therefore we can calculate interest

expense on total debt= 0.10*$1200000= $120000

Earnings before Interest and Tax= 15% of Sales= 0.15*3 million=

$450,000

Interest expense= $120,000

Earnings before interest= $450,000-$120,000= $330,000

Federal tax rate= 40%

Earnings after Tax or Net Income= $330,000(1-0.40)= $198,000

Return on Equity= Net Income / Equity

Equity= Total Assets- Total Liabilities= ($1800000+$600000)-

$1200000= $1200000

Return On equity= $198,000/$1200000= 0.165