Q12BP Colter Steel has \(4,200,000 in ... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 3: Q12BP (page 187)

Colter Steel has $4,200,000 in assets.
Temporary current assets
$1,000,000
Permanent current assets
$2,000,000
Fixed assets
$1,200,000
Total assets
$4,200,000
Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For a graphical example of perfectly matched plans, see Figure 6-5.

Short Answer

Expert verified

The earnings after taxes will be $300,000.

Step by step solution

Information given in the question

The following information is provided:

Long-term interest rates = 13%

Short-term interest rates =8%

Earnings before interest and taxes = $996,000

Tax rate = 40%

Calculation of long-term financing

The long-term financing is $3,200,000.

$Long term financing = Permanent current asset + Fixed asset = $ 2, 000, 000 + $ 1, 200, 000 = $ 3, 200, 000$

Calculation of short-term financing

The short-term financing is $1,000,000. This is the amount of current temporary assets of the organization.

Calculation of interest expense

The interest expense is $496,000.

$Interest expense = Long - term interest expenses + Short - term interest expenses = ($ 3, 200, 000 脳 13 %) + ($ 1, 000, 000 脳 8 %) = $ 416, 000 + $ 80, 000 = $ 416, 000$

Calculation of earnings after taxes

The earning after taxes is $300,000.

$Earnings after taxes = Earnings before interest and taxes - Interest expenses = $ 996, 000 - $ 496, 000 - $ 200, 000 = $ 300, 000$

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January	\(100,000
February	\)93,000
March	\(25,000
April	\)25,000
May	\(20,000
June	\)35,000
July	\(45,000
August	\)45,000
September	\(55,000
October	\)85,000
November	\(105,000
December	\)123,000
Total annual sales	\(756,000

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Short Answer

Step by step solution

Information given in the question

Calculation of long-term financing

Calculation of short-term financing

Calculation of interest expense

Calculation of earnings after taxes

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Temporary current assets	\)1,000,000
Permanent current assets	\(2,000,000
Fixed assets	\)1,200,000
Total assets	\(4,200,000