Lear Inc. Current Assets $700,000 Permanent Current Assets $300,000 Fixed Assets $400,000 Tax Rate 34% Long-Term Financing 10% Short-Term Financing 5%
Requirement:
Question 1: Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing. Lear's earnings before interest and taxes are $200,000. Determine Lear's earnings after taxes under this financing plan.
Question 2: The alternative, Lear might wish to finance all fixed and permanent current assets plus half of its temporary current assets with long-term financing. The same interest rates apply as in part A. Earnings before interest and taxes will be $200,000. What will be Lear's earning after taxes?
Question 3: What are some of the risks and cost considerations with each financing plan?
Note: Provide support for your underlying principle.