Question

Colter Steel has $5,600,000 in assets. Temporary current assets $ 3,200,000 Permanent current assets 1,610,000 Fixed assets 790,000 Total assets $ 5,600,000 Short-term rates are 10 percent. Long-term rates are 15 percent. Earnings before interest and taxes are $1,180,000. The tax rate is 20 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

The Earnings after taxes will be $400,000

Step-by-step explanation:

According to the data we have the following Long term financing funds of Permanent current assets = $1,610,000 and Fixed assets = $790,000 so the total of Long term financing funds= $ 2,400,000

Also, we have Termperory current assets = $3,200,000

Therefore, the Long term interest expenses = $2,400,000 * 15%

= $360,000

and the Short term interest expenses = $3,200,000* 10%

= $ 320,000

Hence, Total interest expenses=$360,000+$ 320,000 =$680,000

So, Earnings before taxes=Earnings before interest and taxes-Interest expenses=$ 1,180,000- $ 680,000 =$500,000

The tax rate is 20 percent, hence, taxes=$500,000*20%=$100,000

Therefore, The Earnings after taxes would be=Earnings before taxes-taxes

=$500,000-$100,000

=$400,000