Question

Colter Steel has $5,650,000 in assets. Temporary current assets $ 3,300,000 Permanent current assets 1,615,000 Fixed assets 735,000 Total assets $ 5,650,000 Assume the term structure of interest rates becomes inverted, with short-term rates going to 14 percent and long-term rates 4 percentage points lower than short-term rates. Earnings before interest and taxes are $1,190,000. The tax rate is 30 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be?

Answer 1

Answer: $345,100

Step-by-step explanation:

Interest on short term financing = Short term liability × short term interest rate

= 3,300,000 x 14%

= $462,000

Interest on Long term borrowing = Long term liability × Long term interest rate

= (1,615,000 + 735,000) × 10%

= $235,000

Total interest expense = $462,000 + $235,000

= $697,000

EBT = EBIT - interest expense

= $1,190,000 - $697,000

= $493,000

Net income = EBT - Tax@30%

= $493,000 - $147,900

= $345,100

Therefore net income or earnings after taxes is $345,100.