Question

Guardian Inc. is trying to develop an asset-financing plan. The firm has $490,000 in temporary current assets and $390,000 in permanent current assets. Guardian also has $590,000 in fixed assets. Assume a tax rate of 30 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 70 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 12 percent on long-term funds and 8 percent on short-term financing. Compute the annual interest payments under each plan.

Answer 1

Conservative approach $ 158,760

Aggresive approach $ 150,675

Step-by-step explanation:

total financing needs:

490,000 + 390,000 + 590,000 = 1470000

Conservative approach

long term financing: 70% of the needs at 12%

1029000 x 0.12 = 123480

remaining 30% financed with short-term at 8%

441,000 x 0.08 = 35280

Total interest expense 158760

Aggresive approach

long term financing: 56.25% of the needs at 12%

826,875 x 0.12 = 99,225

remaining 43.75% financed with short-term at 8%

643,125 x 0.08 = 51,450

Total interest expense $ 150,675