in permanent current assets. Guardian also has $430,000 in Guardan Inc s tying t
ID: 2821613 • Letter: I
Question
in permanent current assets. Guardian also has $430,000 in Guardan Inc s tying to davolio an asset fancing slan. The firm has $330,000 n tomporary curent assets and $230,000 . Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 80 percent of assets financed by long-term sources, and the other aggressive, with only 56.25 percent of assets fnanced by long-lerm souroes. The current interest rate is 12 percent on long-term funds and 7 percent on short-4erm fnancing. Compute the annual interest payments under each plan. Answer is complete and correct. Annual Conservative Aggressive 08,900 97,140 . b. Given that Guardian's eamings before interest and taxes are $210,000, calculate eamings after taxes for each of your altermatives Earning After Aggressive c. What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the sho-term and long-term interest rates were reversed? Conservative Aggressive Total interest Eamings aher taxesExplanation / Answer
a) Given :
b) Given EBIT = 210,000
For Conservative Approach Total interest = $108900
Therefore, EBIT - Interest = EBT (Earnings before Tax )
$210,000 - 108900 = $101100
EBT - Tax = Earnings After Tax
Earnings After Tax = $101100 - 40%*101100
= 101100 - 40440
= $60660
For Aggressive approach total interest = $97143.75
EBIT - Interest = EBT (Earnings before Tax )
210000 - 97143.75 = EBT
EBT = $112856.25
Earnings After Tax = EBT - Tax @40%
= 112856.25 - 45142.50
= $67713.75
Conservative Earnings After Tax = $60660
Aggressive Earnings After Tax = $67713.75
c) Now reversing the interest rate long term interest rate @7%, short term interest rate @12%.
Total Interest for Conservative = $79200
Earnings After Tax for Conservative = $78480
Total Interest for Aggressive = $90956.25
Earnings After Tax for Aggressive = $71426.25
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