Christensen & Assoc. Is developing an asset financing plan. Christensen has $500

ID: 2725551 • Letter: C

Question

Christensen & Assoc. Is developing an asset financing plan. Christensen has $500,000

In current assets, of which 15% are permanent, and $700,000 in fixed assets. The current

long-term rate is 11%, and the current short-term rate is 8.5%. Christensen 's tax rate

is 40%. (16 marks )

A) construct two financing plans----one conservative, with 80 of assets financed by

long-term sources, and the other aggressive, with only 60% of asstes financed by

long-term sources.

B) If Christensen 's earnings before interest and taxes are $325,000, calculate net income

Under each alternative.

C) what are some of the risks associated with each plan ?

D) Which plan would you recommend to Christensen ? Why ?

A. Conservative = 80%

1,200,000 * 0.80 = 960,000 * .11 = 105,600

1,200,000 * 0.20 = 240,000 *.085 = 20,400

105,600 + 20,400 = 126,000

Aggressive = 60%

1,200,000 * 0.60 = 720,000 * .11 = 79,200

1,200,000 * 0.40 = 480,000 * .085 = 40,800

79,200 + 40,800 = 120,000

Conservative Aggressive EBIT 325,000 325,000 -Int 126,000 120,000 EBT 199,000 205,000 Tax 40% 79,600 82,000 EAT 119,400 123,000

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