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Colter Steel has $5,550,000 in assets. Temporary current assets $ 3,100,000 Permanent current assets 1,605,000 Fixed...

Colter Steel has $5,550,000 in assets.

Temporary current assets $ 3,100,000
Permanent current assets 1,605,000
Fixed assets 845,000
Total assets $ 5,550,000

Assume the term structure of interest rates becomes inverted, with short-term rates going to 10 percent and long-term rates 2 percentage points lower than short-term rates. Earnings before interest and taxes are $1,170,000. The tax rate is 40 percent.  

Earnings after taxes =
  

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Answer #2

Solution-

Earning before taxes = Earning before interest and tax - interest expense

Earning after tax = Earning before tax - tax

Calculation of interest on short term financing :

Short term financing = Temporary current assets

Short term financing = $31,00,000

Short term interest rate =10%

Amount of interest on short term financing = $31,00,000*10%= $3,10,000 - (A)

Calculation of interest on long term financing:

Long term financing = Permanent current assets + Fixed assets

Long term financing = $16,05,000+$8,45,000= $24,50,000

Long term rates= 8%

Interest on long term financing =$24,50,000*8%= $1,96,000 - (B)

Total interest = (A) + (B)

Total interest = 3,10,000+1,96,000= $5,06,000

Earning before tax= $11,70,000 -$5,06,000=$6,64,000

Earning after taxes= $6,64,000- ( 6,64,000*40%)= $3,98,400

answered by: anonymous
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