Reference no: EM132780684
Sherlock Homes, a manufacturer of low-cost mobile housing, has $4,900,000 in assets.
Temporary current assets $1,080,000
Permanent current assets $1,660,000
Capital assets $ 2,160,000
Total assets $4,900,000
Short-term rates are 12 percent. Long-term rates are 8 percent. (Note that long-term rates imply a return to any equity). Earnings before interest and taxes are $1,040,000. The tax rate is 40 percent. Assume the term structure of interest rates becomes inverted, with short-term rates going to 12 percent and long-term rates 4 percentage points lower than short-term rates.
If long-term financing is perfectly matched (hedged) with long-term asset needs, and the same is true of short-term financing, what will earnings be after taxes?
What is Earning after taxes
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