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 3 years ago

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