Winfrey Diet Food Corp. has $5,700,000 in assets. Temporary current assets $ 3,4

Question

Winfrey Diet Food Corp. has $5,700,000 in assets. Temporary current assets $ 3,400,000 Permanent current assets 1,620,000 Fixed assets 680,000 Total assets $ 5,700,000 Short-term rates are 12 percent. Long-term rates are 17 percent. Earnings before interest and taxes are $1,200,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? (Omit the "$" sign in your response.) Earnings after taxes $

Explanation / Answer

Long Term Financing: Permanent Current Assets: 1620000 Fixed Assets: 680000 Total = 1620000 + 680000 = 2300000 Short Term Financing Temporary Current Assets: 3400000 Long-term interest expense = 17%*2300000 = 391000 Short-term interest expense = 12%*3400000 = 408000 Total interest expense = 391000 + 408000 = 799000 Earnings before interest and taxes = 1200000 Interest expense = 799000 Earnings before taxes = 401000 Taxes (40%) = 160400 Earnings after taxes = 240600

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