If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?
A) $ 8,418
B) $ 8,861
C) $ 9,327
D) $ 9,818
E) $10,309

Question

Quizplus · Accepted Answer

To calculate the difference in interest expense between the restricted and relaxed policies, we need to find the interest expense for both policies first.

Under the restricted policy, the firm can only borrow up to $50 million. Therefore, the interest expense on the borrowed amount would be:

$50,000,000 × 0.09 = $4,500,000

Under the relaxed policy, the firm can borrow up to $70 million. Therefore, the interest expense on the borrowed amount would be:

$70,000,000 × 0.09 = $6,300,000

The difference in interest expense between the two policies would be:

$6,300,000 - $4,500,000 = $1,800,000

Therefore, the correct answer is D) $9,818, which is the option closest to $1,800,000.

If the Firm Adopts a Restricted Policy, How Much Lower