Colter Steel has $4,550,000 in assets.
Temporary current assets | $ | 1,100,000 |
Permanent current assets | 1,505,000 | |
Fixed assets | 1,945,000 | |
Total assets | $ | 4,550,000 |
Assume the term structure of interest rates becomes inverted,
with short-term rates going to 13 percent and long-term rates 2
percentage points lower than short-term rates. Earnings before
interest and taxes are $970,000. 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?
Calculation of Earnings after taxes | |
$ | |
Long-term financing equals: | |
Permanent current assets | 1,505,000.00 |
Fixed assets | 1,945,000.00 |
3,450,000.00 | |
Short-term financing equals: | |
Temporary current assets | 1,100,000.00 |
Long-term interest expense (11% × $3,450,000) | 379,500.00 |
Short-term interest expense (13% × $1,100,000) | 143,000.00 |
Total interest expense | 522,500.00 |
Earnings before interest and taxes | 970,000.00 |
Interest expense | 522,500.00 |
Earnings before taxes | 447,500.00 |
Taxes (20%) | 89,500.00 |
Earnings after taxes | 358,000.00 |
Colter Steel has $4,550,000 in assets. Temporary current assets $ 1,100,000 Permanent current assets 1,505,000 Fixed...
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