Question

Beard Brothers Inc. has $1,000,000 in current assets and $1,800,000 in capital assets. 1/2 of the current assets are considered to be temporary current assets, and 1/2 are permanent current assets.

Beard Brothers has secured long-term interest rate of 7% and the short-term rate is 4%. The company’s tax rate is 30%.

The CFO has determined that ½ of permanent current assets and all of the capital assets will be financed with long- term debt. ½ of permanent current assets and all temporary current asset will be financed with short-term debt. Assume that all assets will have to be financed.

Required:

a)      Calculate

                                      i.      the amount of short-term financing to be borrowed.

                                     ii.      the amount of long-term financing to be borrowed.

b)      Calculate the amount of interest expense for the year.

c)      If Beard Bros. has EBIT of $425,000, calculate the amount of net income (EAT) for the year.

Answer 1

  

  

( C )	Computation of EAT for the year
	Particulars	Amount                     $
	Earnings before Interest and Tax	425,000.00
	Less :-
	INTEREST EXPENSES
	Long term fund	143,500.00
	Short term fund	30,000.00
	Earnings before Tax	251,500.00
	Less:
	Tax expense @ 30%	75,450.00
	Earnings After Tax ( EAT )	176,050.00

In the given question PARTICULARS current asset Capital Asset Total Assets AMOUNT $ 1,000,000.00 1,800,000.00 2,800,000.00 Computation of temporary current asset and permenant asset Temporary current asset is 1/2 of current asset ie, permenant current asset is 1/2 of current asset ie, $ 5,00,000/- ($1000000*50%) $5,00,000/- ($1000000*50%) Interest rates of borrowings Long term fund Short term fund 7.00% 4.00% CFO's decision about raising of funds 1/2 of the current asset and all the capital asset will be financed through long term fund 1/2 of the permenant current asset and all temporary current asset through short term fund

Computation of Shorterm and long term fund Short term finance 1/2 of permenant current asset 500000/2 All temporary current asset 250,000.00 500,000.00 750,000.00 Long term finance 1/2 of permenant current asset All capital assets 250,000.00 1,800,000.00 2,050,000.00

(b) Computation of interest expense for the year Nature of fund amount in $ (A) 2,050,000.00 750,000.00 Interest rate (B) 7.00% 4.00% Interest Expense (C)= (A) * (B) 143,500.00 30,000.00 Long term fund Short term fund 173,500.00