Can anyone tell me if one of these is correct?
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 775000
Short term financing 625000
EBIT 200000
Less: Short term Interest 31250
Less: Long term Interest 77500
Less: Taxes 27375
EAT 63875
Or,
EBIT: 200,000
LT Expense: 77500
ST Expense: +31250
EBT: =108750
Taxes (30%): -32625
Net Income: =76125
To determine Lear's earnings after taxes under this financing plan, we need to calculate the interest expenses and taxes and subtract them from EBIT (earnings before interest and taxes).
First, let's calculate the interest expense for long-term financing:
Long-term financing amount = $775,000
Interest rate for long-term financing = 10%
Interest expense for long-term financing = Long-term financing amount x Interest rate
= $775,000 x 10%
= $77,500
Next, let's calculate the interest expense for short-term financing:
Short-term financing amount = $175,000 (half of permanent current assets) + $450,000 (variable current assets)
Interest rate for short-term financing = 5%
Interest expense for short-term financing = Short-term financing amount x Interest rate
= ($175,000 + $450,000) x 5%
= $625,000 x 5%
= $31,250
Now, we can calculate EBT (earnings before taxes):
EBIT = $200,000
EBT = EBIT - Long-term interest expense + Short-term interest expense
= $200,000 - $77,500 + $31,250
= $153,750
Next, let's calculate the taxes:
Tax rate = 30%
Taxes = EBT x Tax rate
= $153,750 x 30%
= $46,125
Finally, we can calculate the earnings after taxes (EAT):
EAT = EBT - Taxes
= $153,750 - $46,125
= $107,625
Therefore, Lear's earnings after taxes under this financing plan is $107,625.