Question
Lightning Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $4,400,000, its
Lightning Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $4,400,000, its fixed assets turnover ratio equals 3.7, its debt is 35% of total assets and its common equity is 65% of total assets. EBIT is $330,000, the interest rate on the firm's debt is 8%, and the tax rate is 30%. If the company follows a restricted policy, its total assets turnover will be 3.1. Under a relaxed policy its total assets turnover will be 2.7. If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?
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