Question

Guardian Inc. is trying to develop an asset-financing plan. The
firm has $480,000 in temporary current assets and $380,000 in
permanent current assets. Guardian also has $580,000 in fixed
assets. Assume a tax rate of 40 percent.

**a.** Construct two alternative financing plans for
Guardian. One of the plans should be conservative, with 60 percent
of assets financed by long-term sources, and the other 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 $360,000, calculate earnings after taxes for each of
your alternatives.

**c.** What would the annual interest and earnings
after taxes for the conservative and aggressive strategies be if
the short-term and long-term interest rates were reversed?

Answer #1

Medical Equipment of Orlando Inc. trying to develop an
asset-financing plan. The firm has $2,800,000 in temporary current
assets and $1,200,000 in permanent current assets. The company also
has $6,000,000 in fixed assets.
Part A
Construct two alternative financing plans for Medical of Orlando
Inc. One of the plans should be conservative, with 80 percent of
assets financed by long-term sources and the rest financed by
short-term sources. The other plan should be aggressive, with only
20 percent of assets...

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...

What are the current asset financing strategies that firms
adopt?
Firms manage a variety of current assets. Permanent current
assets are needed for the firm to maintain its business, and they
will be carried even through downturns in business cycles.
Temporary current assets fluctuate seasonally or with business
cycles. Each firm must devise a financing strategy that best fits
its business situation and best manages its risk.
Long-term capital finances all permanent current assets and some
temporary financing needs. Which...

Lear Inc. has $890,000 in current assets, $395,000 of which are
considered permanent current assets. In addition, the firm has
$690,000 invested in fixed assets.
a. Lear wishes to finance all fixed assets and
half of its permanent current assets with long-term financing
costing 10 percent. The balance will be financed with short-term
financing, which currently costs 4 percent. Lear’s earnings before
interest and taxes are $290,000. Determine Lear’s earnings after
taxes under this financing plan. The tax rate...

Lear Inc. has $900,000 in current assets, $400,000 of which are
considered permanent current assets. In addition, the firm has
$700,000 invested in fixed assets.
a. Lear wishes to finance all fixed assets and
half of its permanent current assets with long-term financing
costing 8 percent. The balance will be financed with short-term
financing, which currently costs 5 percent. Lear’s earnings before
interest and taxes are $300,000. Determine Lear’s earnings after
taxes under this financing plan. The tax rate...

Lear Inc. has $1,020,000 in current assets, $460,000 of which
are considered permanent current assets. In addition, the firm has
$820,000 invested in fixed assets.
a. Lear wishes to finance all fixed assets and
half of its permanent current assets with long-term financing
costing 8 percent. The balance will be financed with short-term
financing, which currently costs 5 percent. Lear’s earnings before
interest and taxes are $420,000. Determine Lear’s earnings after
taxes under this financing plan. The tax rate...

Lear, Inc. has $1,600,000 in current assets, $670,000 of which
are considered permanent current assets. In addition, the firm has
$920,000 invested in capital assets.
a. Lear wishes to finance all capital assets and
half of its permanent current assets with long-term financing
costing 10 percent. Short-term financing currently costs 5 percent.
Lear’s earnings before interest and taxes are $520,000. Determine
Lear’s earnings after taxes under this financing plan. The tax rate
is 30 percent.
Earnings after
taxes ...

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?

Sherlock Homes, a manufacturer of low cost mobile housing, has
$4,950,000 in assets.
Temporary current assets
$1,900,000
Permanent current assets
1,545,000
Capital assets
1,505,000
Total assets
$4,950,000
Short-term rates are 9 percent. Long-term rates are 14 percent.
(Note that long‐term rates imply a return to any equity). Earnings
before interest and taxes are $1,050,000. The tax rate is 40
percent.
If long-term financing is perfectly matched (hedged) with long-term
asset needs, and the same is true...

Colter Steel has $4,800,000 in assets.
Temporary current assets
$
1,600,000
Permanent current assets
1,530,000
Fixed assets
1,670,000
Total assets
$
4,800,000
Short-term rates are 12 percent. Long-term rates are 17 percent.
Earnings before interest and taxes are $1,020,000. The tax rate is
40 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?

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