Question

# Colter Steel has \$4,700,000 in assets. Temporary current assets \$ 1,400,000 Permanent current assets 1,520,000 Fixed...

Colter Steel has \$4,700,000 in assets. Temporary current assets \$ 1,400,000 Permanent current assets 1,520,000 Fixed assets 1,780,000 Total assets \$ 4,700,000

Assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 5 percentage points lower than short-term rates. Earnings before interest and taxes are \$1,000,000. The tax rate is 20 percent.

Total Assets = \$4,700,000

Value of temporary current assets = \$1,400,000

Value of Permanent current assets = \$1,520,000

Short term interest rate is 11% and long term interest rate is 6% (5 percentage points lower than short-term rates)

So, Total Interest expenses = (\$1,400,000 × 11%) + (\$1,520,000 × 6%)

= \$154,000 + \$91,200

= \$245,200.

Total Interest expense is \$245,200.

EBIT = \$1,000,000

Net Income = (EBIT - Interest Expense) × (1 - tax rate)

= (\$1,000,000 - \$245,200) × (1 - 20%)

= \$754,800 × 80%

= \$603,840

Net Income of company is \$603,840.

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