Lear, Inc. has $910,000 in current assets, $405,000 of which are considered perm

Question

Lear, Inc. has $910,000 in current assets, $405,000 of which are considered permanent current assets. In addition, the firm has $710,000 invested in fixed assets. a. Lear wishes to finance all fixed assets and half of its permanent current assets with long term financing costing 9 percent. The balance will be financed with short term financing, which currently costs 6 percent. Lear's earnings before interest and taxes are $310,000. Determine Lear's earnings after taxes under this financing plan. The tax rate is 40 percent. b. As an alternative, Lear might wish to finance all of its fixed assets and permanent current assets plus half of its temporary current assets with long term financing and the balance with short term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $310,000. What will be Lear's earnings after taxes? I am looking at how to solve this equation as well if you could lay it out simply

Explanation / Answer

a) earnings before interst and taxes=310000

interest=long term=912500*9%=82125

short term=505000*6%=30300

earnings before taxes=310000-82125-30300=197575

earnings after taxes=197575-40%=118545

b) earnings before interst and taxes=310000

interest=long term=1570000*9%=141300

short term=252500*6%=15150

earnings before taxes=310000-141300-15150=153550

earnings after taxes=153550-40%=92130

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