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 2 years ago

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