Question

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.

Answer 1

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.