Question

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 is 30 percent.

**b.** As an alternative, Lear might wish to finance
all fixed assets and permanent current assets plus half of its
temporary current assets with long-term financing and the balance
with short-term financing. The same interest rates apply as in part
*a*. Earnings before interest and taxes will be $300,000.
What will be Lear’s earnings after taxes? The tax rate is 30
percent.

Answer #1

a). Long term debt will be taken for = 700000 + 400000 x 0.5 = $ 900,000.00

Short term debt = 400000 x 0.5 + 500000 = $ 700,000.00

Total Interest costs = 900000 x 0.08 + 700000 x 0.05 = $ 107,000.00

EBT = 300000 - 107000 = $ 193,000.00

EAT = 193000 x (1-Tax) = 193000 x 0.7 = $135,100.00

b). Long term debt will be taken for = 700000 + 400000 + 500000 x 0.5 = $ 1,350,000.00

Short term debt = 500000 x 0.5 = $ 250,000.00

Interest costs = 1350000 x 0.08 + 250000 x 0.05 = $ 120,500.00

EBT = 300000 - 120500 = $ 179,500.00

EAT = 179500 x (1-0.3) = $ 125,650.00

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 $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 $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?

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?

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?

Colter Steel has $5,250,000 in assets.
Temporary current assets $ 2,500,000
Permanent current assets 1,575,000
Fixed assets 1,175,000
Total assets $ 5,250,000
Short-term rates are 9 percent. Long-term rates are 14 percent.
Earnings before interest and taxes are $1,110,000. 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?

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
Assume the term structure of interest rates becomes inverted,
with short-term rates going to 12 percent and long-term rates 2
percentage points lower than short-term rates. 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...

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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
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Earnings after taxes =

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$ 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.

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