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Chapter 3: Q13BP (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.

Interestexpenses=Long-terminterestexpense+Short-terminterestexpenses=($3,200,000脳6%)+($1,000,000脳11%)=$192,000+$110,00=$302,000

03

Calculation of earnings after taxes 

The earning after taxes is $416,400.

Earningsaftertaxes=Earningsbeforeinterestandtaxes-Interestexpenses-Taxes=$996,000-$302,000-$277,600=$416,400

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