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Chapter 3: 13BP (page 187)

In Problem 12, assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 5 percentage points lower than short-term rates. If all other factors in the problem remain unchanged, what will earnings after taxes be?

Short Answer

Expert verified

The earnings after taxes will be $416,400.

Step by step solution

01

Information given in the question

The following information is provided:

Long-term interest rates = 6%

Short-term interest rates =11%

Earnings before interest and taxes = $996,000

Tax rate = 40%

02

Calculation of interest expense

The interest expense is $302,000.

Interestexpense=Longterminterestexpense+Shortterminterestexpense=$3,200,000脳6%+$1,000,000脳11%=$192,000+$110,000=$302,000

03

Calculation of earnings after taxes

The earning after taxes is $416,400

Earningsaftertaxes=Earningsbeforetaxesandinterests-Interestexpenses-taxes=$996,000-$302,000-$277,600=$416,400

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Most popular questions from this chapter

Gary鈥檚 Pipe and Steel Company expects sales next year to be \(800,000 if the economy is strong, \)500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for next year?

Esquire Products Inc. expects the following monthly sales:

January

\(28,000

February

\)19,000

March

\(12,000

April

\)14,000

May

\(8,000

June

\)6,000

July

\(22,000

August

\)26,000

September

\(29,000

October

\)34,000

November

\(42,000

December

\)24,000

Total annual sales

\(264,000

Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for \(1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.

e. Determine total current assets for each month. Include cash, accounts receivable, and inventory. Accounts receivable equal sales minus 40 percent of sales for a given month. Inventory is equal to ending inventory (part a) times the cost of \)1 per unit.

Darla鈥檚 Cosmetics has annual credit sales of $1,440,000 and an average collection period of 45 days in 2008. Assume a 360-day year. What is the company鈥檚 average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period

Esquire Products Inc. expects the following monthly sales:

January

\(28,000

February

\)19,000

March

\(12,000

April

\)14,000

May

\(8,000

June

\)6,000

July

\(22,000

August

\)26,000

September

\(29,000

October

\)34,000

November

\(42,000

December

\)24,000

Total annual sales

\(264,000

Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for $1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.

a. Generate a monthly production and inventory schedule in units. Beginning inventory in January is 12,000 units. (Note: To do part a, you should work in terms of units of production and units of sales.)

In the second year, Fisk Corporation finds that it can reduce ordering costs to \(2 per order but that carrying costs stay the same at \)1.60 per unit. Also, volume remains at 49,000 units per year.

c. What will the average inventory be?
See all solutions

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