Lear, Inc. has $800,000 is current assets, $300,000 of which are considered permanent current assets.

In addition, the firm has $600,000 in fixed assets.

A. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8%.

B. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing.
The same interest rates apply as in part a. Earnings before interest and taxes will be $250,000.
What will be Lear's earnings after taxes? The tax rate is 40&.

C. What are some of the risks and cost considerations associated with each of these alternative financing strategies?

To calculate Lear, Inc.'s earnings after taxes, let's first determine the financing structure in each scenario.

A. In the first scenario:
- Fixed assets are financed with long-term financing costing 8%.
- Half of the permanent current assets are also financed with long-term financing costing 8%.
- Temporary current assets are not mentioned, so we will assume they are financed using short-term financing.

In this case, the financing mix is:
- Fixed assets: Long-term financing (8%)
- Permanent current assets: Half long-term financing (8%) and half short-term financing
- Temporary current assets: Short-term financing

B. In the second scenario:
- Fixed assets, permanent current assets, and half of the temporary current assets are financed with long-term financing at 8%.
- Earnings before interest and taxes (EBIT) are given as $250,000.
- We need to calculate the earnings after taxes.

Now let's calculate the earnings after taxes in scenario B:

1. Calculate the interest expense:
- Calculate the weighted average cost of capital (WACC) for scenario B.
- The cost of long-term financing is 8%.
- The entire temporary current assets are financed with long-term financing, so they also have a cost of 8%.
- We assume the cost of equity capital is zero for simplicity in this example, but in practice, it should be considered.
- Calculate the interest expense using the WACC for long-term financing.

2. Calculate the earnings before taxes (EBT):
- Subtract the interest expense from EBIT.

3. Calculate the taxes:
- Multiply the EBT by the tax rate of 40%.

4. Calculate the earnings after taxes:
- Subtract the taxes from the EBT.

Now, moving on to part C, let's discuss the risks and cost considerations associated with each financing strategy.

Risks and cost considerations in scenario A (financing fixed assets and half of permanent current assets with long-term financing):

- Long-term financing may have a higher cost compared to short-term financing.
- Permanent current assets financed with long-term debt may create a financing mismatch, as they are not immediately convertible into cash.
- If the company needs additional funds for temporary current assets or unforeseen expenses, it will have to rely on short-term financing, which may be costlier or more challenging to obtain.

Risks and cost considerations in scenario B (financing all fixed assets and permanent current assets plus half of temporary current assets with long-term financing):

- Long-term financing for all fixed assets and extended financing for temporary current assets may result in higher interest expense compared to scenario A.
- If the company faces a decrease in sales or difficulty in collecting accounts receivable, it may struggle to meet its long-term financing obligations. This can potentially strain the company's financial health.
- The higher reliance on long-term financing may limit the company's flexibility to adjust its financing structure in response to changing business conditions.

It's important to note that this is a simplified explanation, and a comprehensive financial analysis should consider other factors specific to Lear, Inc.'s business, industry, and market conditions.