Lear Inc. has $920,000 in current assets, $410,000 of which are considered permanent current assets. In addition, the firm has $720,000 invested in fixed assets.
a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 10 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear’s earnings before interest and taxes are $320,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 30 percent.
EARNINGS AFTER TAXES:
b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $320,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent.
EARNINGS AFTER TAXES: