Posted by **Becky** on Tuesday, June 16, 2009 at 3:33am.

Lear, Inc. has $800,000 in current assets, $350,000 of which are considered permanent current assets. In addition, the firm has $600,000 invested in fixed assets.

a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 10 percent. Short-term financing currently costs 5 percent. Lear’s earnings before interest and taxes are $200,000. Determine Lear’s earnings after taxes under this financing plan.

The tax rate is 30 percent.

A. 175,000(half of working capital)+600,000(fixed assets)=775,000 in assets to be financed with LT Debt (10% interest rate)

The other $175,000(half of permanent current) will be financed at 5% as well as the 450,000 in variable current assets. ($625,000x.05)

Long term financing.

Can anyone tell me if one of these is correct? I have come out with these two figures but I am not sure which is the correct way to go.

EBIT: 200,000

LT Expense: 77500

ST Expense: +31250

EBT: =108750

Taxes (30%): -32625

Net Income: =76125 Or,

Long term financing 775000

Short term financing 625000

EBIT 200000

Less: Short term Interest 31250

Less: Long term Interest 77500

Less: Taxes 27375

EAT 63875

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