Question

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. The balance will be financed with short-term financing, which 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.

Answer 1

$63,875

Step-by-step explanation:

Temporary current assets =Current assets – permanent current assets

=$800,000 – $350,000 = $450,000

Short-term interest expense will be computed as:-

= 5% [$450,000 + ½ ($350,000)]

= $31,250

Long-term interest expense will be computed as:-

= 10% [$600,000 + ½ ($350,000)]

= $77,500

Total interest expense is the sum of the two interest expenses:-

= $31,250 + $77,500

= $108,750

Lear Inc Earnings before interest and taxes = $200,000

Interest expense = - $ 108,750

Earnings before taxes = $91,250

Taxes @ 30% rate ($91,250 X30%) = - $27,375

Earnings after taxes = $63,875