Case Scenario: Collins Systems Inc is trying to develop an asset-financing plan. The firm has $300,000 in temporary current assets and $200,000 in permanent current assets. Collins also has $400,000 in fixed assets.
Construct two alternative financing plans for the firm. One of the plans should be conservative, with 80 percent of assets financed by long-term sources and the rest financed by short-term sources. The other plan should be aggressive, with only 30% of assets financed by long term sources and the remaining assets financed by short-term sources. The current interest rate is 15% on long-term funds and 10% on short-term financing. Compute the annual interest payments under each plan. Given that Collin's earnings before interest and taxes are $180,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 40%.