Fixed assets and half of its permanent current assets

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Lear Inc. has $950,000 in current assets, $425,000 of which are considered permanent current assets. In addition, the firm has $750,000 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. The balance will be financed with short-term financing, which currently costs 6 percent. Lear’s earnings before interest and taxes are $350,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 40 percent.

Earnings after taxes $

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 and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $350,000. What will be Lear’s earnings after taxes? The tax rate is 40 percent.

Earnings after taxes $

Reference no: EM131287194

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