b) Christie Corporation is deciding whether to pursue a relaxed or restricted working capital investment policy....

b) Christie Corporation is deciding whether to pursue a relaxed or restricted working capital investment policy. The firm’s annual sales are expected to be $4,800,000, its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm‘s debt is 8%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?

Expert Solution

Computation of Interest
	Particulars	Restricted	Relaxed
A	Sales	$ 4,800,000	$ 4,800,000
B	Assets Turnover	2.50	2.20
C=A/B	Total Assets	$ 1,920,000	$ 2,181,818
D	Debt/Equity	50%	50%
E	Debt	$ 960,000	$ 1,090,909
F=Ex D	Interest @ 8%	$ 76,800	$ 87,273

If Company adopts restricted policy then it would incur $10,473( i.e $82,273-$76,800) interest lower than Relaxed policy

jeff jeffy answered 1 year ago

Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The...

Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its...

Richmond Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The...

Richmond Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of...

QUESTION 12 Hardwig Inc. Hardwig Inc. is considering whether to pursue a restricted or relaxed current...

QUESTION 12 Hardwig Inc. Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 25%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under...

In deciding whether to pursue a global strategy (central management of a coherent marketing message) or...

In deciding whether to pursue a global strategy (central management of a coherent marketing message) or multi-domestic (each country develops its own message and strategy), what are the considerations which might come to mind in marketing such a decision?

1)In deciding whether to pursue a global strategy (central management of a coherent marketing message) or...

1)In deciding whether to pursue a global strategy (central management of a coherent marketing message) or multi-domestic (each country develops its own message and strategy), what are the considerations which might come to mind in making such a decision? 2)Outsourcing is a strategy extension which can cut costs and provide flexible employment for occasional business activities. What are some situations in which you would not want to outsource?

Travis Daniels has just graduated from Matchbook State University and is deciding whether to pursue his...

Travis Daniels has just graduated from Matchbook State University and is deciding whether to pursue his master's degree. Travis is now 20 years old. He has just been offered a job with Schmultz, Inc. at an annual salary of $45,000 with anticipated annual increases (for inflation), of 3%. Travis anticipates working only through to his planned retirement, on his 65th birthday. Were Travis to defer the job acceptance and attend graduate school at Matchbook State, the tuition would cost $45,000 annually...

Are there any significant difference between working capital management and working capital investment?

(a) What is meant by working capital? (b) Why is an analysis of working capital important?...

(a) What is meant by working capital? (b) Why is an analysis of working capital important? (c) Do a little research to show an example of a corporation with weak or strong working capital and why?

Project A Project B Cost of equipment required $ 155,000 $ 0 Working capital investment required...

Project A Project B Cost of equipment required $ 155,000 $ 0 Working capital investment required $ 0 $ 155,000 Annual cash inflows $ 25,000 $ 40,000 Salvage value of equipment in six years $ 8,600 $ 0 Life of the project 6 years 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries’ discount rate is 14%. Click here to view Exhibit 12B-1 and Exhibit 12B-2,...

Define working capital? How is it measured? Calculate the amount of working capital for Snider Corporation...

Define working capital? How is it measured? Calculate the amount of working capital for Snider Corporation SNIDER CORPORATION Balance Sheet December 31, 2010 Assets Current assets: Cash.............................................................................. $ 50,000 Marketable securities.................................................... 20,000 Accounts receivable (net)............................................. 160,000 Inventory...................................................................... 200,000 Total current assets....................................................... $430,000 Investments................................................................... 60,000 Plant and equipment..................................................... 600,000 Less: Accumulated depreciation.................................. (190,000) Net plant and equipment.............................................. 410,000 Total assets................................................................... $900,000 Liabilities and Stockholders’ Equity Current liabilities Account payable........................................................... $90,000 Notes payable............................................................... 70,000 Accrued taxes............................................................... 10,000 Total current liabilities................................................. 170,000 Long-term liabilities: Bonds payable................................................................. 150,000 Total liabilities.............................................................. $320,000 Stockholders’ equity Preferred stock, $50 per value...................................... 100,000 Common stock, $1...

Question