In: Finance
Guardian Inc. is trying to develop an asset-financing plan. The
firm has $530,000 in temporary current assets and $430,000 in
permanent current assets. Guardian also has $630,000 in fixed
assets. Assume a tax rate of 30 percent.
a. Construct two alternative financing plans for
Guardian. One of the plans should be conservative, with 70 percent
of assets financed by long-term sources, and the other should be
aggressive, with only 56.25 percent of assets financed by long-term
sources. The current interest rate is 12 percent on long-term funds
and 8 percent on short-term financing. Compute the annual interest
payments under each plan.
b. Given that Guardian’s earnings before interest
and taxes are $410,000, calculate earnings after taxes for each of
your alternatives.
c. What would the annual interest and earnings
after taxes for the conservative and aggressive strategies be if
the short-term and long-term interest rates were reversed?