Question

1/ Hicks Health Clubs, Inc., expects to generate an annual EBIT of $506,000 and needs to obtain financing for $1,090,000 of assets. Their tax bracket is 32%. If the firm goes with a short-term financing plan, their rate will be 7.0 percent, and with a long-term financing plan their rate will be 8.0 percent. By how much will their earnings after tax change if they choose the more aggressive financing plan instead of the more conservative? (Amounts in parentheses indicate negative value.)

($7,412)

$7,412

($10,412)

$10,412

2/ Price Corp. is considering selling to a group of new customers and creating new annual sales of $420,000. 3% will be uncollectible. The collection cost on these accounts is 5% of new sales, the cost of producing and selling is 84% of sales and the firm is in the 32% tax bracket. What is the profit on new sales?

$352,800

$29,966

$32,848

$22,848

3/ Modos Company has deposited $4,190 in checks received from customers. It has written $1,530 in checks to its suppliers. The initial bank and book balance was $490. If $3,530 of its customer's checks have cleared but only $490 of its own, calculate its float.

$380

$1,150

$480

$530

Answer 1

1. Aggressive plan means extensive use of short-term financing. Hence, if the company uses aggressive policy,

Particulars	With Short term Aggressive financing	With Long-term Conservative financing
EBIT	506000	506000
Less: Interest @7% for short-term asset	(76,300)
Less: Interest @8% for long-term asset		(87,200.00)
EBT	429,700	418,800
Less: Tax @32%	(137,504.00)	(134,016.00)
EAT	292,196	284,784
Difference	7412

2.

Particulars	Amount
New Annual Sales	420000
Less: Uncollectible Receiveable@3%	(12,600)
Less: Collection Cost(5%*420000)	(21,000)
Less: Cost of sell(420000*84%)	(352,800.00)
Profit before tax	33,600.00
Less: Tax@32%	(10,752.00)
Proft	22,848.00

3.

Checks received from customers      4190

Less: Checks cleared                            (3530)

Checks remaining                                 660

Checks written                                       1530

Less: Checks cleared                             (490)

Checks remaining                                  1040

Float= 1040-660=$380