Question

Guardian Inc. Is trying to develop an asset-financing plan. The firm has $370,000 in temporary current assets and $270,000 In pemanent current assets. Guardian also has $470,000 in fixed assets. Assume a tax rate of 30 percent. a. Construct two alternative financing plans for Guardlan. One of the plans should be conservative, with 70 percent of assets financed by long-term sources, and the other should be aggresslve, with only 56.25 percent of assets financed by long-term sources. The current interest rate Is 12 percent on long-term funds and 8 percent on short-term financing. Compute the annual Interest payments under each plan. Annual Interest servelive Aggressive b. Given that Guardian's earnings before interest and taxes are $250,000, calculate earnings after taxes for each of your alternatives. Earning After Taxes servalivs Aggressive c. What would the annual interest and eanings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed? Conservative Aggressive Total interest Earnings after taxes

Answer 1

Please find below the answer. .please do provide rating..

Answer a)
	Temporary current assets						370000
	Permanent current assets						270000
	Fixed assets						470000
	Total assets						1110000
	Conservative : Computation of annual interest
			Interest rate		Interest cost
	Long term		12%		=1110000*70%*12%		93240
	Sort term		8%		=1110000*30%*8%		26640
	Total interest cost						119880
	Aggressive : Computation of annual interest
			Interest rate		Interest cost
	Long term		12%		=1110000*56.25%*12%		74925
	Sort term		8%		=1110000*43.75%*8%		38850
	Total interest cost						113775
Answer b)	Computation of earning after tax
			Conservative		Aggressive
	EBIT		250000		250000
	Less Interest		119880		113775
	EBT		130120		136225
	Less Tax @ 30%		39036		40867.5
	Earning after tax		91084		95357.5
Answer c)
	Computation of interest cost if interest rate is reversed
	Conservative : Computation of annual interest
			Interest rate		Interest cost
	Long term		8%		=1110000*70%*8%		62160
	Sort term		12%		=1110000*30%*12%		39960
	Total interest cost						102120
	Aggressive : Computation of annual interest
			Interest rate		Interest cost
	Long term		8%		=1110000*56.25%*8%		49950
	Sort term		12%		=1110000*43.75%*12%		58275
	Total interest cost						108225
	Computation of earning after tax
			Conservative		Aggressive
	EBIT		250000		250000
	Less Interest		102120		108225
	EBT		147880		141775
	Less Tax @ 30%		44364		42532.5
	Earning after tax		103516		99242.5
			Conservative		Aggressive
	Total interest		102,120.00		108,225.00
	Earning after tax		103,516.00		99,242.50