Colter Steel has $5,200,000 in assets. Assume the term structure of interest rat
ID: 2738724 • Letter: C
Question
Colter Steel has $5,200,000 in assets.
Assume the term structure of interest rates becomes inverted, with short-term rates going to 14 percent and long-term rates 5 percentage points lower than short-term rates. Earnings before interest and taxes are $1,100,000. The tax rate is 30 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?
Temporary current assets $ 2,400,000 Permanent current assets 1,570,000 Fixed assets 1,230,000 Total assets $ 5,200,000
Explanation / Answer
Long Term Financing Equals: Permanent current assets 15,70,000 Fixed assets 12,30,000 28,00,000 Short Term Financing Equals: Temporary current assets 24,00,000 Long Term Financing Interest 3,92,000 (28,00,000X14%) Short Term Financing Interest 2,16,000 (24,00,000X9%) Total Interest Expense 6,08,000 EBIT 11,00,000 Interest Expense -6,08,000 EBT 4,92,000 Tax @30% -1,47,600 EAT 3,44,400