Question
In: Accounting
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 is 40 percent.
b. As an alternative, Lear might wish to finance
all fixed assets and permanent current assets plus half of its
temporary current assets with long-term financing and the balance
with short-term financing. The same interest rates apply as in part
a. Earnings before interest and taxes will be $270,000.
What will be Lear’s earnings after taxes? The tax rate is 40
percent.
Solutions
Expert Solution
a.
Calculation of Earnings After Tax:
| Earning Before Interest andTax | $ 270000 |
| Less: Interest on Long Term Financing | $ 69000 |
| Interest on Short Term Financing | $ 40650 |
| Earning Before Tax | $ 160350 |
| Less: Tax @ 40% | $ 64140 |
| Earning After Tax | $ 96210 |
Working Note:
1. Long Term Financing Cost
Fixed Assets = $ 670000
Permanent Current Assets (1/2*385000) = $ 192500
Total = $ 862500
Interest = 8% of $ 862500 = $ 69000
2. Short Term Financing Cost
Permanent Current Assets (1/2*385000) = $ 192500
Temporary Current Assets (870000-385000) = $ 485000
Total = $ 677500
Interest = 6% of $ 677500 = $ 40650
b.
Calculation of Earning After Tax
|
Earning Before Interest and Tax |
$ 270000 |
| Less: Interest on Long Term Finance | $ 103800 |
| Interest on Short Term Finance | $ 14550 |
| Earning Before Tax | $ 151650 |
|
Less: Tax @ 40% Earning After Tax |
$ 60660 $ 90990 |
Working Note:
1.Long Term Finance Cost
Fixed Assets = $ 670000
Permanent Current Assets = $ 385000
Temporary Current Assets ( 1/2*485000) = $ 242500
Total = $ 1297500
Interest = 8% of $ 1297500 = $ 103800
2. Short Term Finance Cost
Temporary Current Assets (1/2*485000) = $ 242500
Interest = 6% of 242500 = $ 14550
ekkarill92 answered 1 year agoRelated Solutions
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Cash 870,000
Acc receivable not given
Inventories 1,050,000
Fixed assets 3,220,000
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Current liabilities
Acc payable not given
Long-term debt 1,900,000
Common stock 680,000
Retained earnings 3,190,000
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Sales 18,600,000
Operating expense 14,320,000
EBIT 4,280,000
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EBT 4,014,000
Taxes 1,606,000
Net income 2,408,000
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30.65%
37.58%
62.42%
93.06%
89.03%
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Current assets
Cash 870,000
Acc receivable not given
Inventories 1,050,000
Fixed assets 3,220,000
TOTAL ASSETS 6,200,000
Current liabilities
Acc payable not given
Long-term debt 1,900,000
Common stock 680,000
Retained earnings 3,190,000
TOTAL LIAB and EQUITY 6,200,000
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Operating expense 14,320,000
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