Lear Inc. has $840,000 in current assets, $370,000 of which are considered perma

Question

Lear Inc. has $840,000 in current assets, $370,000 of which are considered permanent current assets. In addition, the firm has $640,000 invested in fixed assets. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear's earnings before interest and taxes are $240,000. Determine Lear's earnings after taxes under this financing plan. The tax rate is 30 percent. 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 and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $240,000. What will be Lear's earnings after taxes? The tax rate is 30 percent. Earnings after taxes $

Explanation / Answer

A. Fixed assets 640000 Permanent current asset 370000 Temporary current asset 470000 Debt finance for Long term finance @ 8% 825000 Debt Finance for short term@7% 655000 Earnings 2,40,000.00 Interest on long term debt 66000 Interest on short term debt 45850 Profit before tax 128150 Tax@30% 38445 Profit after tax      89,705.00 B. Fixed assets 640000 Permanent current asset 370000 Temporary current asset 470000 Debt finance for Long term finance @ 8% 1245000 Debt Finance for short term@7% 235000 Earnings 2,40,000.00 Interest on long term debt 99600 Interest on short term debt 16450 Profit before tax 123950 Tax@30% 37185 Profit after tax      86,765.00

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