Problem 2 Nessie Corp. has $2,500,000 in current assets ($1,800,000 are permanen

Question

Problem 2 Nessie Corp. has $2,500,000 in current assets ($1,800,000 are permanent current assets, 700,000 are temporary current assets). The company also has $3,000,000 in fixed assets. They believe a conservative financing plan will benefit them in current economic conditions so they will use short-term financing at 7% to finance temporary current assets and they will use long-term financing at 9.5% to finance the rest. Construct a conservative financing plan. Calculate earnings after taxes. (10 points) EBIT IS 3,300,000 AND TAXE RATE IS 40%

Explanation / Answer

temporary current assets = 700000

short-term interest rate = 7%

Interest amount = 0.07*700000 = 49000

Remaining assets = 3000000 + 1800000 = 4800000

Long-term interest rate = 9.5%

Interest amount = 0.095*4800000= 456000

Total Interest = 456000 + 49000 = 505000

EBIT = 3300000

EBT = EBIT - Interest = 3300000 - 505000 = 2795000

PAT = (1-tax rate) * EBT = (1-40%) * 2795000 = 1677000

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