Kelly & Assoc. is developing an asset financing plan. Kelly has $500,000 in current assets, of...
Kelly & Assoc. is developing an asset financing plan. Kelly has $500,000 in current assets, of which 15% are permanent, and $700,000 in capital assets. The current long-term rate is 11%, and the current short-term rate is 8.5%. Kelly's tax rate is 40%.
a) Construct three financing plans— the first: perfectly hedged, the second: conservative, with 80% of assets financed by long-term sources, and the third: aggressive, with only 60% of assets financed by long-term sources.
b) If Kelly's earnings before interest and taxes are $325,000, calculate net income under each alternative.
Homework Answers
| 1. | |||
| Current Assets= $500000 | Short Term rate= 8.5% | ||
| Capital Assets= $700000 | Long term rate= 11% | ||
| Plan 1- Perfectly Hedged | Plan 2- Conservative | Plan-3-Aggressive | |
| Interest on Current Assets | 44375 | 8875 | 17750 |
| Interest on Capital Assets | 77000 | 61600 | 46200 |
| Total Interest | 121375 | 70475 | 63950 |
| Tax @40% | 48550 | 28190 | 25580 |
| Earnings after taxes | 72825 | 42285 | 38370 |
| 2. | |||
| Earnings before interest and taxes | 325000 | 325000 | 325000 |
| interest net of taxes | 72825 | 42285 | 38370 |
| Earnings after interest and taxes | 252175 | 282715 | 286630 |
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