Question

Colter Steel has $4,800,000 in assets. Temporary current assets $ 1,600,000 Permanent current assets 1,530,000 Fixed assets 1,670,000 Total assets $ 4,800,000 Short-term rates are 12 percent. Long-term rates are 17 percent. Earnings before interest and taxes are $1,020,000. 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

Colter Steel

Earnings after taxes:

Earnings before interest and taxes = $1,020,000

Interests = $659,500

Pre-tax Earnings = $360,500

Income Tax (40%) 144,200 ($360,500 x 40%)

Earnings after taxes = $216,300

Step-by-step explanation:

a) Interests:

i) Long-term interests = 17% of Fixed Assets ($1,670,000) = $283,900

ii) Short-term interest = 12% of current assets ($4,800,000 - 1,670,000) = $375,600

Total interests = $659,500 ($283,900 + 375,600)

b) Short-term rates are the interest rates for current assets (or short-term borrowings).

c) Long-term rates are the interest rates for long-term assets or fixed assets (or long-term borrowings).