Chance CorpCo is planning on investing $2,400,000 in a brewery. If they use a lo

Question

Chance CorpCo is planning on investing $2,400,000 in a brewery. If they use a low liquidity asset management system their EBIT will be 12.5% of their assets and if they use a high liquidity plan it will be 8.5% of their assets. They have access to long-term financing at the bank for 7% and short-term through a LOC of 5.5%. They will finance all of their assets with debt. Their tax rate is 40%. Please calculate net income with the most aggressive plan, the most conservative plan and both hybrid plans. Please show your computations and label each plan. Also, please provide the degree of financial leverage for all 4 plans.

Can someone show me how to do this step by step? I would appreciate your answer. Thank you in advance

Explanation / Answer

Plan 1 Plan 2 Plan 4 Plan 5 Short Term 960000 1440000 2400000 Long Term 2400000 1440000 960000 EBIT Low Liquidity 8.50% 8.50% 8.50% 8.50% EBIT High Liquidity 12.5% 12.5% 12.5% 12.5% EBIT 300000 261600 242400 204000 Interest Rate short Term 5.5% 5.5% 5.5% 5.5% Interest Rate Long Term 7% 7% 7% 7% Interest Payment 168000 153600 146400 132000 Earnings Before Tax 132000 108000 96000 72000 Tax @ 40% 52800 43200 38400 28800 EAT 79200 64800 57600 43200 Interest =short term Debt x 5% + Long term Debt x 7% EBIT = short term Debt x 8.5% + Long term Debt x 12.5%

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