Exhibit 15.1 Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $4,400,000, 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 total assets turnover will be 2.2. Refer to Exhibit 15.1. If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy? Do not round intermediate calculations. ?
A. $13,320
B. $14,520
C. $12,000
D. $11,400
E. $13,920
Answer: C
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