Question

Colter Steel has $4,850,000 in assets.

Temporary current assets	$	1,700,000
Permanent current assets		1,535,000
Fixed assets		1,615,000
Total assets	$	4,850,000

Assume the term structure of interest rates becomes inverted, with short-term rates going to 13 percent and long-term rates 3 percentage points lower than short-term rates. Earnings before interest and taxes are $1,030,000. The tax rate is 20 percent.  

Earning after taxes______
  

Answer 1

Solution:
	Earning after taxes	395,200
Working Notes:
	Long-term financing equals:
	Permanent current assets	1,535,000	a
	Fixed assets	1,615,000	b
	Total Long-term financing	3,150,000	c=a+b
	Short-term financing equals:
	Temporary current assets	1,700,000	d
	Now computation interest expense
	Short-term interest expense	221,000	e=d x 13%
	[$1,700,000 x 13% ]
	Long-term interest expense	315,000	f = c x 10%
	[3,150,000 x (13% - 3%) ]
	Total interest expense	536,000	g=e+f
	Earnings before interest and taxes	$1,030,000	h=given
	less: interest expense	536,000	i=from g
	Earnings before taxes	494,000	j=h-i
	Less: Taxes @ 20%	98,800	k=j x 20%
	[494,000 x 20% ]
	Earning after taxes	395,200	l=j-k
Please feel free to ask if anything about above solution in comment section of the question.