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Sherlock Homes, a manufacturer of low cost mobile housing, has $5,000,000 in assets.    Temporary current...

Sherlock Homes, a manufacturer of low cost mobile housing, has $5,000,000 in assets.
  
Temporary current assets $2,000,000
Permanent current assets 1,550,000
Capital assets 1,450,000
Total assets $5,000,000
Short-term rates are 10 percent. Long-term rates are 15 percent. (Note that long‐term rates imply a return to any equity). Earnings before interest and taxes are $1,060,000. The tax rate is 20 percent.

If long-term financing is perfectly matched (hedged) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For an example of perfectly hedged plans, see Figure 6-8.
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