Assignment-Alternative Financing Plans

Assignment-Alternative Financing Plans - Lear Inc. Current...

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Lear Inc. Current Assets $790,000 Permanent Current Assets $350,000 Fixed Assets $600,000 Tax Rate 34% Long-Term Financing 9% Short-Term Financing 5% Lear, Inc., has $790,000 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 9 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 34 percent. Ans. Current assets – permanent current assets = temporary current assets $790,000 – $350,000 = $440,000 Short-term interest expense = 5% [$440,000 + ½ ($350,000)] = 5% ($615,000) = $30,750 Long-term interest expense = 9% [$600,000 + ½ ($350,000)] = 9% ($775,000) = $69,750 Total interest expense = $30,750 + $69,750 = $100,500 Earnings before interest and taxes
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This note was uploaded on 05/07/2010 for the course ACCOUNTING ACC225 taught by Professor Professor during the Spring '10 term at University of Phoenix.

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Assignment-Alternative Financing Plans - Lear Inc. Current...

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