Chapter 3: 12BP (page 187)

Colter Steel has $4,200,000 in assets.
Temporary current assets
$1,000,000
Permanent current assets
$2,000,000
Fixed assets
$1,200,000
Total assets
$4,200,000
Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For a graphical example of perfectly matched plans, see Figure 6-5.

Short Answer

Expert verified

The earnings after taxes will be $300,000.

Step by step solution

Information given in the question

The following information is provided:

Long-term interest rates = 13%

Short-term interest rates =8%

Earnings before interest and taxes = $996,000

Tax rate = 40%

Calculation of long-term financing

The long-term financing is $3,200,000.

$L o n g t e r m f i n a n c i n g = P e r m a n e n t c u r r e n t a s s e t s + F i x e d a s s e t s = 2, 000, 000 + 1, 200, 000 = 3, 200, 00$

Calculation of Short-term financing

The short-term financing is $1,000,000. This is the amount of current temporary assets of the organization

Calculation of interest expense

The interest expense is $496,000

$I n t e r e s t E x p e n s e = L o n g t e r m I n t e r n e t e x p e n s e s + S h o r t t e r m I n t e r n e t e x p e n s e s = (3, 200, 000 \times 13 %) + (1, 000, 000 \times 8 %) = $ 416, 000 + $ 80, 000 = $ 496, 000$

Calculation of earnings after taxes

The earning after taxes is $300,000.

$E a r n i n g s a f t e r t a x e s = E a r n i n g s b e f o r e i n t e r e s t a n d t a x e s - I n t e r n e t e x p e n s e s - T a x e s = $ 996, 000 - $ 496, 000 - $ 200, 000 = $ 300, 000$

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Short Answer

Step by step solution

Information given in the question

Calculation of long-term financing

Calculation of Short-term financing

Calculation of interest expense

Calculation of earnings after taxes

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Strategic Direction

Intermediate Accounting

Operational Management

Introduction to Business

Managers

Organizational Communication

Study anywhere. Anytime. Across all devices.

Temporary current assets	\)1,000,000
Permanent current assets	\(2,000,000
Fixed assets	\)1,200,000
Total assets	\(4,200,000