ALTERNATIVE FINANCING PLAN

ALTERNATIVE FINANCING PLAN - Lear, Inc., has $800,000 in...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Lear, Inc., has $800,000 in current assets, $350,000 of which are considered permanent current assets. In addition, the firm has $600,000 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. Short-term financing currently costs 5 percent. Lear’s earnings before interest and taxes are $200,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 30 percent. Current assets – permanent = temporary $800,000 – $350,000 = $450,000 Short-term interest expense = 5% [$450,000 + ½ ($350,000)] = 5% ($625,000) = $31,250 Long-term interest expense = 10% [$600,000 + ½ ($350,000)] = 10% ($775,000) = $77,500 Total interest expense = $31,250 + $77,500 = $108,750 before interest and taxes $200,000 Interest expense 108,750 EBT $ 91,250 Taxes (30%) 27,375 after taxes $ 63,875 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. The same interest rates apply as in part a. Earnings before interest and
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/27/2010 for the course FIN 200 taught by Professor Bresett during the Spring '10 term at University of Arizona- Tucson.

Page1 / 2

ALTERNATIVE FINANCING PLAN - Lear, Inc., has $800,000 in...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online