Matching asset mix and financing plans Winfrey Diet Food Corp. has $4,500,000 in
ID: 2363757 • Letter: M
Question
Matching asset mix and financing plans Winfrey Diet Food Corp. has $4,500,000 in assets. Temporary current assets $1,000,000 Permanent current assets 1,500,000 Fixed assets 2,000,000 Total assets $4,500,000 Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $960,000. 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?Explanation / Answer
Long term finanaicning option
Permanent cureent assests
1500 000
Fixed assets
2 000 000
3500 000
Short term assests
temporary
1000 000
Long term intrest-13%x3500 000
455 000
Short term intrest-8% x1000 000
80 000
Total intrest expense
535 000
Earning before
960 000
intrest
535 000
earningBefore taxes
425 000
taxes
170 000
Earning after txes
255000
Long term finanaicning option
Permanent cureent assests
1500 000
Fixed assets
2 000 000
3500 000
Short term assests
temporary
1000 000
Long term intrest-13%x3500 000
455 000
Short term intrest-8% x1000 000
80 000
Total intrest expense
535 000
Earning before
960 000
intrest
535 000
earningBefore taxes
425 000
taxes
170 000
Earning after txes
255000