Question

How do you figure out what Conservative and Aggressive amounts will be? I can not ind anythng in my tet book that delves into this enough. Thank you. Guardian Inc. is trying to develop an asset-financing plan. The firm has $400,000 in temporary current assets and
$300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.
a. Construct two alternative financing plans for the firm. One of the plans should be conservative, with 75 percent of
assets financed by long-term sources and the rest financed by short-term sources.
The other plan should be aggressive, with only 56.25 percent of assets financed by long-term sources.
The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing.
Compute the annual interest payments under each plan.
b. Given that Guardian’s earnings before interest and taxes are $200,000, calculate earnings after taxes for
each of your alternatives.
Solution
Problem 6-14
Instructions
Complete the templates below to solve the requirements of this problem.
Temporary current assets		$400,000
Permanent current assets		300,000
Fixed assets		500,000
Total assets		$1,200,000
a.
Conservative	Amount	% of	Dollar	Interest	Interest
		Total	Amount	Rate	Expense
Long-term sources	FORMULA	75%	FORMULA	15%	FORMULA
Short-term sources	FORMULA	25%	FORMULA	10%	FORMULA
				Total interest charge	FORMULA
Aggressive	Amount	% of	Dollar	Interest	Interest
		Total	Amount	Rate	Expense
Long-term sources	$1,200,000	56.25%	FORMULA	15%	FORMULA
Short-term sources	$1,200,000	43.75%	FORMULA	10%	FORMULA
				Total interest charge	FORMULA
b.	Conservative	Aggressive
EBIT
Less: Interest	FORMULA	FORMULA
EBT	FORMULA	FORMULA
Tax (40%)	FORMULA	FORMULA
EAT	FORMULA	FORMULA

Answer 1

a.

Temporary current assets $ 400,000

Permanent current assets 300,000

Fixed assets 500,000

Total assets 1200000

conservative-

Amount % interest rate interest expense

1200000 x .75 = 900000 x .15 = 135000

1200000 x .25 = 300000 x .10 = 30000

total = 165000

Aggresive -

1200000 x .5625 = 675000 x .15 = 101250

1200000 x .4375 = 525000 x .10 = 52500

total = 153750

b).

conservative aggresive

EBIT 200000 200000

- int. 165000 153750

EBT 35000 46250

- tax 14000 18500

EAT 21000 27750