#$2.(15$ points$)$ Pennington Auto Group is considering whether to pursue a restricted or relaxed collection

policy. The firm's monthly sales are expected to be $$400,000$ for each month of the next year, its fixed

assets turnover ratio equals $3\mathrm{.}5,$ and its debt and common equity are $40\%$ and $60\%$ of total assets,

respectively. Expected EBIT in $10$ K $($annual financial statement$)$ is $$180,000,$ the annual interest rate on

the firm's debt is $7\mathrm{.}5\%,$ and the tax rate is supposed to be $32\%$ for the year. If the company follows a

restricted policy, its total assets turnover will be $2\mathrm{.}5.$ Under a relaxed policy its total assets turnover will be

$2\mathrm{.}0.$

$($a$)$ If the firm adopts a restricted policy, how much lower would its annual interest expense be than under

the relaxed policy? $(5$ points$)$

$($b$)$ What's the difference in the projected ROEs under the restricted and relaxed policies? $(5$ points$)$

$($c$)$ Assume now that the company believes that if it adopts a restricted policy, its sales will fall by $14\%$ and

EBIT will fall by $10\%,$ but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the

same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed

policies? $(5$ points$)$