Lear, Inc. has $1,350,000 in current assets, $570,000 of which are considered permanent current assets. In...

Lear, Inc. has $1,350,000 in current assets, $570,000 of which are considered permanent current assets. In addition, the firm has $820,000 invested in capital assets.

a. Lear wishes to finance all capital assets and half of its permanent current assets with long-term financing costing 10 percent. Short-term financing currently costs 5 percent. Lear’s earnings before interest and taxes are $420,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 30 percent.

Earnings after taxes $

b. As an alternative, Lear might wish to finance all capital assets and permanent current assets plus half of its temporary current assets with long-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $420,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent.

Earnings after taxes $

c. Not available in Connect.

Solutions

Expert Solution

Part a)

Permanent current assets = $570,000; Half of permanent current assets = Permanent current assets/2 = $570,000/2 = $285,000; capital assets = $820,000

Long-term finance = All capital assets + Half of permanent current assets = $820,000+$285,000 = $1,105,000

Interest on long-term finance = Long-term finance*10% = $1,105,000*10% = $110,500

Earnings before taxes = Earnings before interest and taxes - Interest = $420,000 - $110,500 = $309,500

Taxes = Earnings before taxes*tax rate = $309,500*30% = $92,850

Earnings after taxes = Earnings before taxes - Taxes = $309,500 - $92,850 = $216,650

Part b)

Permanent current assets = $570,000; Temporary current assets = Current assets - Permanent current assets = $1,350,000 - $570,000 = $780,000; Half of temporary current assets = Temporary current assets/2 = $780,000/2 = $390,000 capital assets = $820,000

Long-term finance = All capital assets + Half of temporary current assets + permanent current assets = $820,000+$390,000+$570,000 = $1,780,000

Interest on long-term finance = Long-term finance*10% = $1,780,000*10% = $178,000

Earnings before taxes = Earnings before interest and taxes - Interest = $420,000 - $178,000 = $242,000

Taxes = Earnings before taxes*tax rate = $242,000*30% = $72,600

Earnings after taxes = Earnings before taxes - Taxes = $242,000 - $72,600 = $169,400

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Lear Inc. has $870,000 in current assets, $385,000 of which are considered permanent current assets. In...

Lear Inc. has $870,000 in current assets, $385,000 of which are considered permanent current assets. In addition, the firm has $670,000 invested in fixed assets. a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 6 percent. Lear’s earnings before interest and taxes are $270,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate...

Lear Inc. has $1,030,000 in current assets, $465,000 of which are considered permanent current assets. In...

Lear Inc. has $1,030,000 in current assets, $465,000 of which are considered permanent current assets. In addition, the firm has $830,000 invested in fixed assets. a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 9 percent. The balance will be financed with short-term financing, which currently costs 6 percent. Lear’s earnings before interest and taxes are $430,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate...

Lake Corporation has €950,000 in current assets, out of which €425,000 are considered permanent current assets....

Lake Corporation has €950,000 in current assets, out of which €425,000 are considered permanent current assets. In addition, the firm has €750,000 invested in fixed assets. The company has two financing plans under consideration: Plan 1: Lake wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 10 percent. The balance will be financed with short-term financing, which currently costs 6 percent. Lake’s earnings before interest and taxes are €350,000. The tax rate...

Colter Steel has $4,750,000 in assets. Temporary current assets $ 1,500,000 Permanent current assets 1,525,000...

Colter Steel has $4,750,000 in assets. Temporary current assets $ 1,500,000 Permanent current assets 1,525,000 Fixed assets 1,725,000 Total assets $ 4,750,000 Short-term rates are 11 percent. Long-term rates are 16 percent. Earnings before interest and taxes are $1,010,000. The tax rate is 30 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?

Colter Steel has $5,050,000 in assets. Temporary current assets $ 2,100,000 Permanent current assets 1,555,000 Fixed...

Colter Steel has $5,050,000 in assets. Temporary current assets $ 2,100,000 Permanent current assets 1,555,000 Fixed assets 1,395,000 Total assets $ 5,050,000 Assume the term structure of interest rates becomes inverted, with short-term rates going to 14 percent and long-term rates 2 percentage points lower than short-term rates. Earnings before interest and taxes are $1,070,000. The tax rate is 30 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term...

Colter Steel has $5,450,000 in assets. Temporary current assets $ 2,900,000 Permanent current assets 1,595,000 Fixed...

Colter Steel has $5,450,000 in assets. Temporary current assets $ 2,900,000 Permanent current assets 1,595,000 Fixed assets 955,000 Total assets $ 5,450,000 Short-term rates are 7 percent. Long-term rates are 12 percent. Earnings before interest and taxes are $1,150,000. The tax rate is 20 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?

Colter Steel has $4,850,000 in assets. Temporary current assets $ 1,700,000 Permanent current assets 1,535,000 Fixed...

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______

Explain the “aggressive”, “conservative” and “moderate” approaches to financing fixed assets, permanent current assets and temporary...

Explain the “aggressive”, “conservative” and “moderate” approaches to financing fixed assets, permanent current assets and temporary current assets. What are the potential risks and rewards of each approach? Give an example of when a conservative approach is more appropriate. Give an example of when an aggressive approach might be more appropriate. Describe the Term Structure of Interest Rates and explain the following theories: Liquidity Premium Theory? Market Segmentation Theory? Expectations Hypothesis Theory?

Marathon Inc. (a C corporation) reported $1,350,000 of taxable income in the current year. During the...

Marathon Inc. (a C corporation) reported $1,350,000 of taxable income in the current year. During the year, it distributed $135,000 as dividends to its shareholders as follows: $6,750 to Guy, a 5 percent individual shareholder. $20,250 to Little Rock Corp., a 15 percent shareholder (C corporation). $108,000 to other shareholders. How much of the dividend payment did Marathon deduct in determining its taxable income? Assuming Guy’s marginal ordinary tax rate is 37 percent, how much tax will he pay on...

Which of the following is not considered a permanent difference? a. Interest received on municipal bonds....

Which of the following is not considered a permanent difference? a. Interest received on municipal bonds. b. Stock-based compensation expense. c. Fines resulting from violating the law. d. Premiums paid for life insurance on a company's CEO when the company is the beneficiary.

Subjects