Matching asset mix and financing plans. Colter Steel has $4,200,000 in assets. T
ID: 2740905 • Letter: M
Question
Matching asset mix and financing plans. Colter Steel has $4,200,000 in assets. Temporary current assets $1,000,000 Permanent current assets 2,000,000 Fixed assets 1,200,000 Total assets $4,200,000 Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $996,000. 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? For a graphical perfectly matched plans
Explanation / Answer
Long term financing equivalents
Fixed assets = 1,200,000
Permanent current assets = 2,000,000
Total long term financing equivalents= 3,200,000
Short term financing equivalents
Temporary current assets= $1,000,000
Long term interest rate= 13%
Short term interest rate= 8%
Long term interest expense = 3,200,000*13%= $416,000
Short term interest expense = 1,000,000*8%= $80,000
Total interest expenses = $496,000
Earnings before interest and tax= S996,000
Interest expense= $496,000
Earnings before tax = $500,000
Taxes (Tax rate=40%) = $200,000
Earnings after tax= $300,000