Question

1.

Colter Steel has $4,700,000 in assets. Temporary current assets Permanent current assets Fixed assets Total assets $ 1,400,000 1,520,000 1780,000 $ 4,700,000 Assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 5 percentage points lower than short-term rates. Earnings before interest and taxes are $1,000,000. The tax rate is 20 percent. Earnings after taxes

2.

Answer 1

Answer (1). Long Term Financing equals Permanent Current Assets and Fixed Assets. Short term financing equals temporary current assets.

Permanent Current Assets = $1,520,000

Fixed Assets = $1,780,000

Total Long Term Finance raised

to support long-term assets = --------------------------

$ 3,300,000

--------------------------

Interest on long term finance = (11-5)% * 3300000 = $198,000

Short term financing = $1,400,000

Interest on short term finance = 11% * 1400000 = $ $154,000

Total Interest = $(198000+154000)

= $352,000

Now, Earnings before interest and tax = $ 1,000,000

Interest = ($352,000)

Earnings Before Tax = $648,000

Tax (0.2*648000)= ($129,600)

Earnings After TAx = $ 518,400

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(2) (a)

Month	Amount	Annual Interest Rate	Monthly Interest Rate	Monthly Interest
January	8300	7%	0.58%	48.14
February	2300	8%	0.67%	15.41
March	3300	11%	0.92%	30.36
April	8300	14%	1.17%	97.11
May	9300	12%	1%	93
June	4300	12%	1%	43
			Total	327.02

(2) (b)

Month	Amount	Annual Interest Rate	Monthly Interest Rate	Monthly Interest
January	8300	12%	1%	83
February	2300	12%	1%	23
March	3300	12%	1%	33
April	8300	12%	1%	83
May	9300	12%	1%	93
June	4300	12%	1%	43
			Total	358