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 financing, what will earnings after taxes be?

Expert Solution

Long term financing would be equal to permanent current assets plus fixed assets
Short term financing would be equal to current assets

Calculation of interest to finance the assets
Long term financing	12%*(1,555,000+1,395,000)
Long term financing	12%*2950000
Long term financing	$354,000

Short term financing	14%*2100000
Short term financing	$294,000

Total interest expense	$648,000

Calculate earnings after taxes as shown below:
Earnings before interest and taxes	$1,070,000
Less: Interest expense	$648,000
Earnings before taxes	$422,000
Taxes @ 30%	$126,600
Earnings after taxes	$295,400

Thus, earnings after taxes is $295,400

jeff jeffy answered 2 years ago

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______

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?

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?

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 ...

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...

Sher Homes, a manufacturer of low-cost mobile housing, has $4,950,000 in assets. Temporary current assets $1,900,000...

Sher Homes, a manufacturer of low-cost mobile housing, has $4,950,000 in assets. Temporary current assets $1,900,000 Permanent current assets 1,545,000 Capital assets 1,505,000 Total assets $4,950,000 Short-term rates are 9 percent. Long-term rates are 14 percent. (Note that long‐term rates imply a return to any equity). Earnings before interest and taxes are $1,050,000. The tax rate is 40 percent. If long-term financing is perfectly matched (hedged) with long-term asset needs, and the same is true of short-term financing,...

Quicker bricks company $5200000 in asset that need financing Temporary current asset $1500000 Permanent current asset...

Quicker bricks company $5200000 in asset that need financing Temporary current asset $1500000 Permanent current asset 2000000 Capital assets 1700000 Total assetes 5200000 Short term rate 9 percent Long term rate 18 percent Earnings before interest and taxes are $1089000. The tax rate is 35 percent. If qucker bricks is the following a more conservative approach with long term fianancing sources being used for both long term asset and 40% of temporary current asset what will be EAT be?You need...

Question