Illustrate what happen if the short-term rates were reversed

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Reference no: EM13108591

Q. Guardian, Inc. is trying to develop an asset-financing plan. The organization has $400,000 in temporary current assets and $300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.

a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 75 percent of assets financed by long-term sources and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing.

b. Given that Guardian’s earnings before interest and taxes are $200,000, compute earnings after taxes for each of your alternatives.

c. Illustrate what would happen if the short- and long-term rates were reversed?

Reference no: EM13108591

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