Lear - 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

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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 current assets = temporary current assets $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 Earnings before interest and taxes $200,000 Interest expense 108,750 Earnings before taxes $ 91,250 Taxes (30%) 27,375 Earnings after taxes $ 63,875 b. As an alternative, Lear might wish to finance all fixed assets and permanent
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This note was uploaded on 08/22/2011 for the course ACCOUNTING 201 taught by Professor Stevejoseph during the Winter '11 term at Aarhus Universitet.

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Lear - 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

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