Lear ine. han $1,030,000 in ourrent asnels, $65,000 ef which ae considered peman

Question

Lear ine. han $1,030,000 in ourrent asnels, $65,000 ef which ae considered pemanent cument assets In addtion, the frm hsn $830,000 invested in Sxnd assets a Lesr wishes to finsnce al fxed assets and haf of its permanent current assets with long-term financing costing 9 percent. The balance will be finsnced with shotHerm firancing,which curenily costs 6 percent Lear's earnings before iterest andes are S430,000. Determne Lear's eerrngs after tex" under franci ng plan. The tax rate is 40 percent afer b. As an altemative, Lear might wish to finance al fxed assets and pemanent curmrant assets plus half of its temporary curent assets with long-berm Srancing and the balance with short-derm financing. The same interest rates apply as in part a. Eamings before interest and taxes wiE be $430,0CO. What will be Lear's eamings after taxes? The tax rate is 40 peroent Eamings ather taxe

Explanation / Answer

a. Computation of Earnings after taxes under Option A.

Earnings after Taxes = (Earnings Before interest and Tax - Interest )* ( 1 - Tax Rate)

Earnings after Taxes = ($430000 - (($830000 + $232500)* 0.09) - ($1030000 - $232500)*0.06)* ( 1 - 0.40)

Earnings after Taxes = ($430000 - $95625 - $47850) * ( 1 - 0.40)

Earnings after Taxes = $171915

b. Computation of Earnings after taxes under Option B.

Earnings after Taxes = (Earnings Before interest and Tax - Interest )* ( 1 - Tax Rate)

Earnings after Taxes = ($430000 - (($830000 + $465000 + $282500)* 0.09) - ($282500)*0.06) * ( 1 - 0.40)

Earnings after Taxes = ($430000 - $141975 - $16950) * ( 1 - 0.40)

Earnings after Taxes = $162645

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