Question

Colter Steel has $5,400,000 in assets. Temporary current assets $ 2,800,000 Permanent current assets 1,590,000 Fixed assets 1,010,000 Total assets $ 5,400,000 Short-term rates are 12 percent. Long-term rates are 17 percent. Earnings before interest and taxes are $1,140,000. The tax rate is 40 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

Step-by-step explanation:

Long term Financing = Permanent Current Assets + Fixed Assets

Long term Financing = $1,590,000 + $1,010,000 = $2,600,000

Short Term Financing = Temporary Current Assets = $2,800,000

Long Term Interest Expense = $2,600,000 * 0.17 = $442,000

Short Term Interest Expense = $2,800,000 * 0.12 = $336,000

Total Interest Expense = $442,000 + $336,000 = $778,000

Earnings before Taxes = Earnings before Interest & Taxes - Interest Expense

Earnings before Taxes = $1,140,000 - $778,000 = $362,000

Earnings after Taxes = Earnings before Taxes * (1 – Tax rate)

Earnings after Taxes = $362,000 * (1 – 0.40) = $217,200