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Chapter 3: Q14BP_b (page 187)

Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has \(500,000 in fixed assets. Assume a tax rate of 40 percent.

b. Given that Guardian鈥檚 earnings before interest and taxes are \)200,000, calculate earnings after taxes for each of your alternatives.

Short Answer

Expert verified

The earnings after tax will be $21,000 in the conservative approach and $27,750 in the aggressive approach.

Step by step solution

01

Information given in the question

The following information is provided:

Temporary current assets =$400,000

Permanent current assets =$300,000

Fixed assets =$500,000

Total assets =$1,200,000

Tax rate = 40%

02

Calculation of earnings after taxes in the conservative approach

The earnings after taxes will be $21,000 in the conservative approach.

Earningaftertaxes=Earningsbeforeinterestandtaxes-InterestExpenses-Taxes=$200,000-$165,000-$14,000=$21,000

03

Calculation of earnings after taxes in the aggressive approach

The earnings after taxes will be $27,750 in the aggressive approach.

Earningaftertaxes=Earningbeforeinterestandtaxes-Interestexpenses-Taxes=$200,000-$153,750-$46,250=$27,750

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Most popular questions from this chapter

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of \(8 per order, and carrying costs of \)1.60 per unit.

d. What is the total cost of ordering and carrying inventory?

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d. Monthly payments.

What is the difference between pledging accounts receivable and factoring accounts receivable?

What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?

Assume that Hogan Surgical Instruments Co. has \(2,500,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high-liquidity plan, the return will be 14 percent. If the firm goes with a short-term financing plan, the financing costs on the \)2,500,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $2,500,000 will be 12 percent. (Review Table 6-11 for parts a, b, and c of this problem.)

a. Compute the anticipated return after financing costs with the most aggressive asset financing mix.

b. Compute the anticipated return after financing costs with the most conservative asset financing mix.

c. Compute the anticipated return after financing costs with the two moderate approaches to the asset financing mix.

d. Would you necessarily accept the plan with the highest return after financing costs? Briefly explain.
See all solutions

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