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Chapter 3: 13BP (page 187)

In Problem 12, assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 5 percentage points lower than short-term rates. If all other factors in the problem remain unchanged, what will earnings after taxes be?

Short Answer

Expert verified

The earnings after taxes will be $416,400.

Step by step solution

01

Information given in the question

The following information is provided:

Long-term interest rates = 6%

Short-term interest rates =11%

Earnings before interest and taxes = $996,000

Tax rate = 40%

02

Calculation of interest expense

The interest expense is $302,000.

Interestexpense=Longterminterestexpense+Shortterminterestexpense=$3,200,000×6%+$1,000,000×11%=$192,000+$110,000=$302,000

03

Calculation of earnings after taxes

The earning after taxes is $416,400

Earningsaftertaxes=Earningsbeforetaxesandinterests-Interestexpenses-taxes=$996,000-$302,000-$277,600=$416,400

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Most popular questions from this chapter

Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.

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