Question

Colter Steel has $4,600,000 in assets.

Temporary current assets $ 1,200,000

Permanent current assets 1,510,000

Fixed assets1,890,000

Total assets$ 4,600,000

Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $980,000. The tax rate is 30 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?

Earnings after taxes_________________ $

Answer 1

Fixed Asset = $1,890,000

Permanent Current Asset= $1,510,000

Non-Permanent current Asset= $1200000

Long Term Financing Equals= $1,890,000+$1,510,000= $3,400,000

Interest on Long Term Financing= $3,400,000*13%= $442,000

Short Term Financing Equals= 1,200,000

Interest on Short Term Financing= $1,200,000*8%=$96,000

Earning Before Interest and Tax.....................$980,000

Less: Interest on Long term debt.....................($442,000)

Less: Interest on Short term debt....................($96,000)

Earnings Before Tax...........................................$442,000

Less: Taxes..................................................($132,600)

Earnings after taxes..............................................$309,400