a. Construct two alternative financing plans for Guardian. One of the plans shou

Question

a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 90 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 12 percent on long-term funds and 9 percent on short-term financing. Compute the annual interest payments under each plan. Annual Interest Conservative 122,850 Aggressive 112,219 b. Given that Guardian's earnings before interest and taxes are $230,000, calculate earnings after taxes for each of your alternatives. Earning After Taxes Conservative 75,005 Aggressive 82,447 c. What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long- term interest rates were reversed? Conservative Aggressive Total interest Earnings after taxes

Explanation / Answer

Total Interest - Rates are reversed i.e. long term financing @ 9% and short term financing @ 12%

Total Assets = 1,050,000

COnservative

90% assets finaned with long term sources hence, long term finaning = 945,000 and short term financing = 105,000

= 945,000* 9%+ 105,000 *12% = 97,650

Aggresive

56.25% assets finaned with long term sources hence, long term finaning = 590,625 and short term financing = 459,375

= 590,625 * 9%+ 1495,395 *12% = 97,650

Earnings after tax

Conservative = 230,000 - 97,650 - 30% * ( 230,000 - 97,650) = 92,645

Aggresive = 230,000 - 108,281.25 - 30% * ( 230,000 - 108,281.25) = 85,203.13

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