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You MUST submit every homework assignment to be eligible to take the upcoming exam. All homework
assignments MUST be done on your own. No collaboration is allowed. You can talk to the instructor or
the TA if you have questions.
Keep all the calculations with 4 decimals. Always show your calculations.
Due: 18:25 pm, December, 16
Late homework: no credit will be given; however, you still must submit it
Submit to: Teaching Assistant
Total points possible: 100
a. If the firm adopts a restricted policy, how much will it save in interest expense (relative to
what it would be if the Company were to adopt a relaxed policy)?
b. What is the difference in the projected ROEs between the restricted and relaxed policies?
c. Assume now the company expects that if it adopts a restricted policy, its sales will fall by 15
percent, EBIT will fall by 10 percent, but its total assets turnover, debt ratio, interest rate,
and tax rate will remain the same. In this situation, what is the difference in the projected
ROEs between the restricted and relaxed policies?