Week 5 Assignment- Alternative Financing Plans

Week 5 Assignment- Alternative Financing Plans - 14. Lear,...

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14. 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 5%[450,000+50%(350,000)] 5%[450,000+175,000] 5%[625,000] 31,250 = short-term interest Long-term interest 10%[600,000+50%(350,000)] 10%[600,000+175,000] 10%[775,000] 77,500 = long-term interest Total interest = 31,250+77,500 Total interest = 108,750 EBIT = 200,000 Interest -108,750 EBT 91,250 Taxes (30%) -27,375 Earnings after tax $63,875 b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary
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This note was uploaded on 11/09/2010 for the course FIN 200 FIN 200 taught by Professor Smith during the Spring '10 term at University of Phoenix.

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Week 5 Assignment- Alternative Financing Plans - 14. Lear,...

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