Question

# Colter Steel has \$5,150,000 in assets.    Temporary current assets \$ 2,300,000 Permanent current assets 1,565,000...

Colter Steel has \$5,150,000 in assets.

 Temporary current assets \$ 2,300,000 Permanent current assets 1,565,000 Fixed assets 1,285,000 Total assets \$ 5,150,000

Short-term rates are 7 percent. Long-term rates are 12 percent. Earnings before interest and taxes are \$1,090,000. The tax rate is 20 percent.

If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be?

 Earnings after taxes?

Long term financing = Permanent current assets + Fixed costs

= \$1,565,000 + \$1,285,000

= \$2,850,000

Long term interest expense = \$2,850,000 * 12%

= \$342,000

Short term financing = Temporary current assets

= \$2,300,000

Short term interest expense = \$2,300,000 * 7%

= \$161,000

Total interest expense = Long term interest expense + Short term interest expense

= \$342,000 + \$161,000

= \$503,000

Earnings before taxes = Earnings before interest and taxes - Total interest expense

= \$1,090,000 - \$503,000

= \$587,000

Earnings after taxes = \$587,000 - (\$587,000 * 20%)

= \$587,000 - \$117,400

= \$469,600