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Chapter 3: Q15BP_a (page 187)

Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.

a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear鈥檚 earnings before interest and taxes are \)240,000. Determine Lear鈥檚 earnings after taxes under this financing plan. The tax rate is 30 percent.

Short Answer

Expert verified

The earnings after tax will be $89,705 in the first plan.

Step by step solution

01

Information given in the question

The following information is provided:

Temporary current assets =$470,000

Permanent current assets =$370,000

Fixed assets =$640,000

Total assets =$1,480,000

Tax rate = 30%

02

Calculation of interest expense

The interest expense will be $111,850

Longterminterestexpense=Assetstobefinanced脳Interestrate=($640,000+12脳370,000)脳8%=$825,000脳8%=$66,000

ShortTerminterestexpense=Assetstobefinanced脳Interestrate=($470,000+12脳370,000)脳7%=$655,000脳7%=$45,850

03

Calculation of earnings after tax

The earnings after tax will be $89,705.

Earningsaftertaxes=Earningsbeforeinterestandtaxes-Interestexpenses-=$240,000-$111,850-$38,445=$89,705

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Most popular questions from this chapter

Route Canal Shipping Company has the following schedule for aging of accounts receivable:

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