Lear, Inc., has $800,000 in current assets, $350,000 of which are considered per

Question

Lear, Inc., has $800,000 in current assets, $350,000 of which are considered permanent
current assets. In addition, the firm has $600,000 invested in fixed assets.
a. Lear wishes to finance all fixed assets and half of its permanent current
assets with long-term financing costing 10 percent. Short-term financing
currently costs 5 percent. Lear’s earnings before interest and taxes are
$200,000. Determine Lear’s earnings after taxes under this financing plan.
The tax rate is 30 percent.
b. As an alternative, Lear might wish to finance all fixed assets and permanent
current assets plus half of its temporary current assets with long-term financing.
The same interest rates apply as in part a. Earnings before interest and
taxes will be $200,000. What will be Lear’s earnings after taxes? The tax
rate is 30 percent.What are some of the risks and cost considerations associated with each of
these alternative financing strategies

(

Explanation / Answer

a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 10 percent. Short-term financing currently costs 5 percent. Fixed assets - $600,000 Current Assets - $350,000 Total permanent assets = $950,000 Interest rate 10% - Interest Amount - $95,000 Current assets (short term) - $450,000 Interest rate – 5% - Interest Amount - $22,500 Lear’s earnings before interest and taxes are $200,000 Less Interest $117,500 Income before Income tax $ 82,500 Less Income tax 30% $24,750 Income after Tax $ 57,750 b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $200,000. Fixed assets - $600,000 Current Assets - $350,000 (Permanent) Current Assets - $225,000 ( temporary) Total assets = $1,175,000 Interest rate 10% - Interest Amount - $117,500 Current assets (short term) - $225,000 Interest rate – 5% - Interest Amount - $11,250 Lear’s earnings before interest and taxes are $200,000 Less Interest $128,750 Income before Income tax $ 71,250 Less Income tax 30% $21,375 Income after Tax $ 49,875

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.