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 Assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 3 percentage points lower than short-term rates. 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

Earning after Taxes = $508,800

Step-by-step explanation:

Long Term Financing need

Permanent Current assets $1,610,000

Fixed assets $790,000

Total $2,400,000

Short Term Financing need

Temporary Current Assets $3,200,000

Total $3,200,000

Long term interest expenses= $2,400,000 * (11% - 3%)

Long term interest expenses= $192,000

Short term interest expenses = $3,200,000 * 11%

Short term interest expenses = $352,000

Total Interest expenses = Long term interest expenses + Short term interest expenses

Total Interest expenses = $192,000 + $352,000

Total Interest expenses = $544,000

Earning before Interest and Tax $1,180,000

Less: Interest Expenses $544,000

Earning Before Taxes $636,000

Less: Tax ($636,000 at 20%) $127,200

Earning after Taxes $508,800