# Alternative Financing Plans Summary

Pages: 2 (457 words) Published: January 16, 2011
December 9, 2010
FIN/200

Alternative Financing Plans
14. 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 earning after taxes under this financing plan. The tax rate is 30 percent. First, I have to find the interest expense on both short- and long- term loans. So, I subtract permanent assets from current assets to get temporary current assets which I use to figure out the short- term interest expense: \$800,000- \$350,000= \$450,000.

Short- term interest expense= .05\$450,000+ 12\$350,000=00)- term interest expense= .05(\$450,000 + assets to get temporary current assets which I use to figure out the short- term in.05\$450,000+\$175,000=.05\$625,000=\$31,250

Long- term interest expense= .10\$600,000+ 12\$350,000=.10\$600,000+\$175,000= .10\$775,000=\$77,500 Then, I add the short- and long- term interest: \$31,250 + \$77,500= \$108,750. Earnings before interest and taxes | \$200,000|

Interest expenses| 108,750|
Earnings before taxes| 91,250|
Taxes (30%)| 27,375|
Earnings after taxes| \$63,875|

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 \$200,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent. This one is similar to part a, so first I have to calculate the interest expense for short- and long- term loans for all assets. Short- term interest expense: .0512\$450,000= .05\$225,000=\$11,250 Long-term interest expense: .10\$600,00+\$350,000+ 12\$450,000=...