Alternative Financing Plans

Alternative Financing Plans - Fin 200 Alternative Financing...

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Fin 200 Alternative Financing Plans 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 ($800,000) - permanent current ($ 350,000 ) = temporary current ($450,000) Long-term interest expense = 10% ( $600,000 + .5 ($350,000) ) = 10% × ($775,000) = $77,500 Short-term interest expense = 5% ( $450,000 + .5 ($350,000) ) = 5% × ($625,000) = $31,250 Total interest expense = $77,500 + $31,250 = $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
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b. As an alternative, Lear might wish to finance all fixed assets and permanent
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This note was uploaded on 12/07/2011 for the course ACC 400 STBSBA73 taught by Professor Gilbertrodriguez during the Summer '09 term at University of Phoenix.

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Alternative Financing Plans - Fin 200 Alternative Financing...

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